business law ( PDFDrive )

Part 3 Business transactions

sincerity in the matter it had deposited £1,000 at the Fisher v Bell (1960)
Alliance Bank to meet possible claims. Mrs Carlill bought
one of the smoke balls, used it as directed but still caught A shopkeeper had a flick-knife on display in his shop
’flu. She claimed the £100 reward but was refused, so window. He was charged with offering for sale an offen-
she sued the company in contract. The company put for- sive weapon contrary to the provisions of the Restriction
ward a number of arguments in its defence: (a) It claimed of Offensive Weapons Act 1959. His conviction was
that it had attempted to contract with the whole world, quashed on appeal. The Divisional Court of the Queen’s
which was clearly impossible. The Court of Appeal held Bench Division held that the display of goods with a
that the company had made an offer to the whole world price ticket attached in a shop window is an invitation to
and it would be liable to anyone who came forward and treat and not an offer to sell. (The Restriction of Offensive
performed the required conditions. (b) The company fur- Weapons Act 1961 was passed soon after this case to
ther submitted that the advertisement was in the nature close the loophole in the law.)
of a trade ‘puff’ and too vague to be a contract. The
court dealt with this argument by asking what ordinary Pharmaceutical Society of Great
members of the public would understand by the adver- Britain v Boots Cash Chemists
tisement. The court took the view that the details of use (Southern) Ltd (1953)
were sufficiently definite to constitute the terms of a con-
tract and that the reference to the £1,000 deposited at Boots operated a self-service, ‘supermarket’ system at
a bank was evidence of an intention to be bound. (c) The its Edgware branch in which the merchandise, including
company also argued that the claimant had not pro- drugs on the Poisons List, was laid out on open shelves
vided any consideration in return for its promise. The around the shop. Customers selected their purchases
court held that the inconvenience of using the smoke from the shelves, placed them in a wire basket and paid
ball as directed was sufficient consideration. (d) Finally, for them at a cash desk which was supervised by a reg-
the company submitted that there was no notification istered pharmacist. The Pharmaceutical Society claimed
of acceptance in accordance with the general rule. The that by operating this system Boots had committed an
court held that in this kind of contract, which is known as offence contrary to s 18 of the Pharmacy and Poisons
a unilateral contract, acceptance consists of performing Act 1933, which states that the sale of drugs included on
the requested act and notification of acceptance is not the Poisons List must take place in the presence of a
necessary. qualified pharmacist. The Pharmaceutical Society argued
that the sale took place when a customer placed his
The court concluded that Mrs Carlill was entitled to purchase in the basket, which was not supervised by a
recover the £100 reward. pharmacist. The Court of Appeal held that the display of
drugs on the open shelf constituted an invitation to treat.
It is important to identify when a true offer has been The customer made the offer to buy at the cash desk
made because once it is accepted the parties are bound. and the sale was completed when the cashier accepted
If the words and actions of one party do not amount to the offer. Since the cash desks were supervised by a
an offer, however, the other person cannot, by saying ‘I registered pharmacist, the requirements of the Act had
accept’, create a contract. A genuine offer must, there- been fulfilled and, therefore, Boots had not committed
fore, be distinguished from what is known as an ‘invita- an offence.
tion to treat’.

An invitation to treat Thus, it is a clearly established principle of civil law
that if goods are displayed for sale with an incorrect
This is where a person holds himself out as ready to price ticket attached to them, the retailer is not obliged
receive offers, which he may then either accept or reject. to sell at that price. Under the criminal law, however, the
The following are examples of invitations to treat. retailer may find himself facing a prosecution for an
unfair commercial practice.
1 The display of goods with a price ticket attached in
a shop window or on a supermarket shelf. This is not 2 Advertisements, catalogues and brochures. Many
an offer to sell but an invitation for customers to make businesses make use of the press, TV, commercial radio
an offer to buy.

206

Chapter 7 Introduction to the law of contract

and, in more recent times, the Internet, to sell their pro- 4 Auctions. At an auction sale the call for bids by an
ducts direct to the public. Even if the word ‘offer’ is used, auctioneer is an invitation to treat. The bids are offers.
the advertisement is still an invitation to treat. The auctioneer selects the highest bid and acceptance is
completed by the fall of the hammer.

Partridge v Crittenden (1968) Payne v Cave (1789)

Partridge placed an advertisement in the Cage and The defendant made the highest bid for the claimant’s
Aviary Birds magazine, which read ‘Bramblefinch cocks, goods at an auction sale, but he withdrew his bid before
bramblefinch hens, 25s each’. A Mr Thompson replied to the fall of the auctioneer’s hammer. It was held that
the advertisement and was sent a bramblefinch hen. the defendant was not bound to purchase the goods.
Partridge was charged with ‘offering for sale’ a wild bird His bid amounted to an offer which he was entitled to
contrary to the provisions of the Protection of Birds Act withdraw at any time before the auctioneer signified
1954 and was convicted at the magistrates’ court. His acceptance by knocking down the hammer. The com-
conviction was quashed on appeal to the Divisional mon law rule laid down in this case has now been
Court of the Queen’s Bench Division. The court held that codified in s 57(2) of the Sale of Goods Act 1979.
since the advertisement constituted an invitation to treat
and not an offer to sell, Partridge was not guilty of the Advertising a forthcoming auction sale does not amount
offence with which he had been charged. to an offer to hold it.

Comment. It should be noted that the word ‘offer’ did Harris v Nickerson (1873)
not appear in the advertisement in this case. However, in
Spencer v Harding (1870) a circular containing the word
‘offer’ was held to be an invitation to treat.

An advertisement placed in a newspaper or magazine The defendant, an auctioneer, advertised in the London
by a mail order firm constitutes an invitation to treat: papers that a sale of various goods including office
the customer makes the offer, which may be accepted or furniture would take place in Bury St Edmunds. The
rejected by the mail order firm. claimant travelled from London to attend the sale, but
the items of furniture he had been commissioned to
Similar principles apply to electronic trading via the buy were withdrawn from the sale. It was held that the
Internet, otherwise known as e-commerce. Posting defendant auctioneer was not obliged to compensate
advertisements on a website amounts to an invitation the claimant for a wasted journey. Advertising that a sale
to treat; by selecting the products and services required, of certain items will take place is a mere declaration of
the customer is making an offer to buy, which may intention. It does not create a binding contract with any-
be accepted or rejected by the seller. So if a company by one who acts on the advertisement by attending the sale.
mistake advertises on its website £200 video recorders
for sale at £2, it could refuse to sell the goods at the However, advertising that an auction will be ‘without
advertised price. reserve’ amounts to an offer by the auctioneer that once
the auction has commenced the lot will be sold to the
Although most advertisements will be treated as in- highest bidder however low the bids might be (Warlow
vitations to treat, there are some situations where an v Harrison (1859) and more recently Barry v Heathcote
advertisement may be regarded as a definite offer, e.g. as Ball & Co (Commercial Auctions) Ltd (2000)).
in Carlill v Carbolic Smoke Ball Co (1893).
5 Tenders. Large undertakings, such as public authorit-
3 Company prospectuses. When a company wishes to ies, often place contracts by inviting interested firms to
raise capital by selling shares to the public, it must issue tender (offer) for the business. An invitation to tender
a prospectus (an invitation to treat). Potential investors can give rise to a binding obligation on the part of the
apply for shares (the offer) and the directors then decide inviter to consider tenders submitted in accordance with
to whom to allot shares (the acceptance). the conditions of the tender.

207

Part 3 Business transactions

Blackpool and Fylde Aero Club Ltd v vidual contract. If the supplier refuses to fulfil the order,
Blackpool Borough Council (1990) he will be in breach of contract (Great Northern Rly Co
v Witham (1873)). This form of tender does not prevent
The defendant council invited the claimant club, together the supplier giving notice that he will not supply potatoes
with six other parties, to tender for the concession to in the future or the School Meals Service from not plac-
offer pleasure flights from the council-owned airport. The ing orders, if they decide to cut potatoes from the school
invitation to tender required tenders to be submitted in dinner menu.
accordance with an elaborate procedure and stated that
tenders received after 12 noon on 17 March 1983 would The process of competitive tendering came under
not be considered. The club’s tender was delivered scrutiny in the following case.
by hand and placed in the letterbox in the Town Hall at
11 am on 17 March. Unfortunately, the letterbox was not Harvela Investments Ltd v Royal Trust
cleared until the next day. The club’s tender was marked Co of Canada Ltd (1985)
late and was not considered by the council. The con-
cession was awarded to another tenderer. The club sued The first defendants decided to dispose of shares in
for breach of a contract to consider tenders which con- a company by sealed competitive tender. They sent
formed with the requirements specified by the council. identical telexes to two prospective purchasers, the
The Court of Appeal held that by adopting a formal ten- claimants and the second defendants, inviting tenders
dering procedure the council impliedly undertook to and promising to accept the highest offer. The claimants
consider all conforming tenders. The council’s invitation bid $2,175,000, while the second defendants bid
to tender was an offer to consider all qualifying tenders ‘$2,100,000 or $101,000 in excess of any other offer’.
and the submission by the club of a tender within the The first defendants accepted the second defendants’
time limit was an acceptance. The club was entitled to offer. The House of Lords held that the second defend-
damages for breach of contract. ants’ ‘referential bid’ was invalid. The decision was a
practical one. The purpose of competitive tendering is to
The acceptance of a tender has different legal con- secure a sale at the best possible price. If both parties
sequences, depending on the wording of the original had submitted a referential bid, it would have been
invitation to tender. There are two possibilities, as impossible to ascertain an offer and no sale would have
follows. resulted from the process.

Example 1

The Metropolitan Borough of Newtown invites tenders 6 Statements of price in negotiations for the sale of
for the supply of 100 tons of potatoes for the use of the land. Where the subject matter of a proposed sale is
School Meals Service in the Borough from 1 January to land, the courts are reluctant to find a definite offer to
31 December. The acceptance of a tender creates a legally sell unless very clearly stated.
binding contract. The successful supplier must deliver
100 tons of potatoes which the Borough must pay for.

Harvey v Facey (1893)

Example 2 Harvey sent a telegram to Facey. ‘Will you sell us Bumper
Hall Pen? Telegraph lowest cash price . . .’ Harvey tele-
The Metropolitan Borough of Newtown invites tenders graphed his response: ‘We agree to buy Bumper Hall
for the supply of potatoes, not exceeding 100 tons, for the Pen for £900 asked by you. Please send us your title
period 1 January to 31 December as and when required deeds.’ The Judicial Committee of the Privy Council held
by the School Meals Service. The acceptance of a ten- that there was no contract. Facey’s reply to Harvey’s
der in this situation has the effect of creating a standing initial enquiry was not an offer to sell but merely a state-
offer on the part of the supplier to deliver potatoes if and ment of the price he might be prepared to sell at if he
when orders are placed by the School Meals Service. wished to sell. As Facey had not made an offer, Harvey’s
Each time an order is placed by the School Meals Ser- second telegram could not amount to an acceptance.
vice it constitutes an acceptance which creates an indi-

208

Chapter 7 Introduction to the law of contract

Clifton v Palumbo (1944) Sometimes it is difficult to decide whether the offeree
is making a counter-offer or simply asking for more
In the course of negotiations for the sale of a large estate, information about the offer. A request for more infor-
the claimant wrote to the defendant: ‘I am prepared to mation will not reject the offer.
offer my Lytham estate for £600,000. I also agree that
sufficient time shall be given to you to complete a sched- Stevenson v McLean (1880)
ule of completion.’ The Court of Appeal held that these
words did not amount to a firm offer to sell, but rather a The defendant offered to sell a quantity of iron to the
preliminary statement as to price. claimants for cash. The claimants asked whether they
could have credit terms. When no reply to their enquiry
Gibson v Manchester City Council (1979) was forthcoming, the claimants accepted the terms of
the original offer. Meanwhile, the defendant had sold the
In 1970 the Council adopted a policy of selling its council iron elsewhere. It was held that the enquiry was a request
houses to tenants. The City Treasurer wrote to Mr Gibson for more information, not a rejection of the offer. The
in February 1971 stating that the council ‘may be pre- defendant was liable for breach of contract.
pared to sell’ the freehold of his house to him at a discount
price. The letter invited Mr Gibson to make a formal 3 By revocation before acceptance. An offer may be
application which he duly did. In May 1971 control of the revoked (withdrawn) at any time before acceptance but
council passed from the Conservatives to Labour and the it will only be effective when the offeree learns about it.
policy of selling council houses was reversed. Only legally
binding transactions were allowed to proceed. The coun- Byrne v Van Tienhoven (1880)
cil did not proceed with Mr Gibson’s application. The
House of Lords held that the City Treasurer’s letter was The defendants posted a letter in Cardiff on 1 October
an invitation to treat and not an offer to sell. Mr Gibson’s to the claimants in New York, offering to sell them 1,000
application was the offer and, as this had not been ac- boxes of tinplates. On 8 October the defendants posted
cepted by the council, a binding contract had not been a letter withdrawing the offer, which was received by the
formed. claimants on 20 October. However, on 11 October the
claimants telegraphed their acceptance which they con-
Termination of the offer firmed by letter posted on 15 October. It was held that a
An offer can end in a number of ways: revocation takes effect only when communicated to the
1 By acceptance. An offer which has been accepted offeree. The contract in this case came into existence
constitutes a contract. That offer is no longer available when the defendants’ offer was accepted by the claimants
for acceptance. on 11 October. The letter of revocation was ineffective
2 By rejection. An offer is rejected if: as it was received after the acceptance was complete.
■ the offeree notifies the offeror that he does not wish
It is not necessary that the offeror himself should tell
to accept the offer; the offeree that the offer has been revoked; the informa-
■ the offeree attempts to accept subject to certain tion may be conveyed by a reliable third party.

conditions; Dickinson v Dodds (1876)
■ the offeree makes a counter-offer.
The defendant, on Wednesday, offered to sell some prop-
Hyde v Wrench (1840) erty to the claimant, the offer to be left open until 9 am,
Friday. On Thursday, the claimant heard from a Mr Berry
Wrench offered to sell his farm to Hyde for £1,000. Hyde that the defendant had sold the property to someone
replied with a ‘counter-offer’ of £950, which was refused. else. Nevertheless, the claimant wrote a letter of accept-
Hyde then said that he was prepared to meet the original ance which was handed to the defendant at 7 am on
offer of £1,000. It was held that no contract had been the Friday morning. The Court of Appeal held that as the
formed. The ‘counter-offer’ of £950 had the effect of claimant had heard about the revocation from Berry,
rejecting Wrench’s original offer. who was a reliable source, the offer was no longer avail-
able for acceptance. No contract had been formed.

209

Part 3 Business transactions

In Dickinson v Dodds the offer was expressed to be 2 27 September proposal from P to C was an offer to
open until Friday at 9 am. Such an offer may be revoked carry out the work for a fixed overall price of £98,760
before the end of the time limit, unless it has already (the second offer). The court took the view that this
been accepted. second offer superseded the first offer and had the
effect of revoking the first offer. Its reasons for reach-
Routledge v Grant (1828) ing this conclusion were that the basis for calculating
the price was quite different in the two offers; the sec-
The defendant offered to buy the claimant’s house, ond offer contained more detail than the first offer and
giving the claimant six weeks to consider the proposal. included P’s standard terms and conditions.
It was held that the defendant could withdraw the offer
at any time before acceptance, even though the deadline 3 C’s fax of 15 October purported to be an accept-
had not yet expired. The claimant’s attempt to accept ance of the first offer. However, as this offer had been
the offer after it had been withdrawn was ineffective. revoked, it could not be accepted. C’s fax was a
counter-offer, which P accepted by carrying out the
An offer may be revoked by a second, subsequent removal. Even if the first offer had not been revoked
offer. However, the second offer must be sufficiently at C’s fax would have been a counter-offer as it included
odds with the first offer so that both cannot be accepted. a new term limiting the overall cost to £100,000.

Pickfords Ltd v Celestica Ltd (2003) A promise to keep an offer open will be binding if it
can be enforced as a separate contract. A legally binding
As Dyson LJ stated in the opening remarks of his option will be created if the offeree provides some con-
judgment in the Court of Appeal: ‘it is as if the facts of sideration in return for the offeror’s promise to keep the
this case have been devised for an examination question offer open.
on the law of contract for first year law students.’
Mountford v Scott (1975)
The claimant P, a removal company, had been ap-
proached by the defendant C, an IT company, concerning The purchaser of a house paid the seller £1 for an option
a proposed move of workshop and office equipment to buy, exercisable within six months. The Court of
from Stoke-on-Trent to Telford. On 13 September 2001, Appeal held that the seller could not withdraw the offer
P sent a fax to C, offering to carry out the work at a rate before the option expired.
of £890 per load (excluding VAT) plus extras for insur-
ance etc. P calculated that it would take 96 loads to The Law Revision Committee recommended in 1937
complete the move, giving rise to an estimated budget that a promise to keep an offer open for a definite period
figure of £100,000. During the next fortnight P carried of time or until the happening of a specific event should
out a more detailed survey of the proposed move and on be binding even if there is no consideration for the
27 September sent a further more detailed document promise. In 1975 the Law Commission made a similar
to C in which it was stated that P would carry out the recommendation but limited to promises made ‘in the
work for a fixed price quotation of £98,760. A copy of course of a business’.
P’s standard terms and conditions were enclosed. On
15 October 2001, C sent a fax to P headed ‘Confirmation’ The effect of revocation in the case of a potentially
which stated that an order had been raised to cover the ‘unilateral’ contract, such as in Carlill’s case, is not
quotation and that the cost was not to exceed £100,000. straightforward. Where the offer has been made to the
P carried out the work and claimed the fixed sum of whole world, as, for example, where a reward has been
£98,760. C paid only £33,000. offered in a newspaper for the return of a lost dog,
a revocation will probably be effective as against anyone
The Court of Appeal applied the following analysis to who has yet to start looking for the dog, provided it is
the sequence of events. given the same publicity as the original offer of the
reward. However, if someone has started to perform the
1 13 September fax from P to C was an offer to carry out act requested in the offer, the offer cannot be revoked.
the work for a fixed price per vehicle load (the first
offer).

210

Chapter 7 Introduction to the law of contract

Errington v Errington (1952) What is a reasonable time will vary with the type of
contract.

A father bought a house for his son and daughter-in-law 5 Death. If the offeror dies after having made an offer
to live in. The father paid a deposit of one-third of the and the offeree is notified of the death, any acceptance
purchase price and borrowed the balance from a building will be invalid. However, where the offeree accepts in
society. He told his son and daughter-in-law that if they ignorance of what has happened, the fate of the offer
paid the mortgage he would convey the house to them seems to depend on the nature of the contract. An offer
when all the instalments had been paid. The Court of which involves the personal service of the offeror clearly
Appeal held that the father’s offer could not be revoked cannot be enforced, but other offers may survive, be
provided the son and daughter-in-law continued to accepted and carried out by the deceased’s personal rep-
make the mortgage payments. resentatives. If the offeree dies, there can be no accept-
ance. The offer was made to that person and no one else
Soulsbury v Soulsbury (2007) can accept.

In this case the Court of Appeal had to consider whether 6 Failure of a condition attached to the offer. An offer
an agreement between a divorced couple whereby the may be made subject to conditions. Such a condition
husband agreed to leave his former wife £100,000 in may be stated expressly by the offeror or implied by the
his will rather than paying maintenance of £12,000 a year courts from the circumstances. If the condition is not
could be enforced by the courts. The husband made a satisfied, the offer is not capable of being accepted.
will in 1991 leaving his former wife £100,000 but shortly
before his death in 2002 he married again, which had the Financings Ltd v Stimson (1962)
effect of revoking the 1991 will. The Court of Appeal held
that the agreement was binding on the husband’s estate The defendant saw a car at the premises of a dealer on
and his former wife was entitled to damages. Longmore 16 March. He wished to obtain the car on hire-purchase.
LJ described the arrangement as a classic unilateral con- He signed a form provided by the claimant finance com-
tract of the Carlill v Carbolic Smoke Ball or the ‘walk to pany which stated that the agreement would be binding
York’ kind. ‘Once the promisee acts on the promise by only when signed by the finance company. The defend-
inhaling the smoke ball, by starting the walk to York or ant took possession of the car and paid the first instal-
(as here) by not suing for the maintenance to which she ment on 18 March. However, being dissatisfied with the
was entitled, the promisor cannot revoke or withdraw his car, he returned it to the dealer two days later. On the
offer. But there is no obligation on the promisee to con- night of 24–25 March the car was stolen from the dealer’s
tinue to inhale, to walk the whole way to York or to refrain premises, but was recovered badly damaged. On 25
from suing. It is just that if she inhales no more, gives up March the finance company signed the hire-purchase
the walk to York or does sue for her maintenance, she is agreement, unaware of what had happened. The defend-
not entitled to claim the promised sum.’ ant refused to pay the instalments and was sued for
breach of the hire-purchase agreement. The Court of
4 If the offer lapses. The offeror may stipulate that the Appeal held that the hire-purchase agreement was not
offer is only open for a limited period of time. Once the binding because the defendant’s offer to obtain the car
time limit has passed, any acceptance will be invalid. on hire-purchase was subject to an implied condition
Even if no time limit is mentioned, the offer will not that the car would remain in substantially the same state
remain open indefinitely. It must be accepted within a until acceptance. Since the implied condition had not
reasonable time. been fulfilled at the time the finance company purported
to accept, no contract had come into existence.
Ramsgate Victoria Hotel Co v Montefiore
(1866)

The defendant offered to buy shares in the claimant’s Acceptance
company in June. The shares were eventually allotted in
November. The defendant refused to take them up. The Once the presence of a valid offer has been established,
Court of Exchequer held that the defendant’s offer to the next stage in the formation of an agreement is to find
take the shares had lapsed through an unreasonable an acceptance of that offer. The acceptance must be
delay in acceptance.

211

Part 3 Business transactions

made while the offer is still open. It must be absolute Walford v Miles (1992)
and unqualified.

Unconditional acceptance The defendants owned a photographic processing
business, which they wished to sell. In 1985 there were
If the offeree attempts to vary the terms offered, this will unsuccessful negotiations with a company. In 1986, the
be treated as a counter-offer. As we have already seen in claimants heard that the business was for sale for about
Hyde v Wrench, this has the effect of rejecting the ori- £2 million. The claimants were keen to buy at this price
ginal offer. A similar problem exists in ‘battle of forms’ because they thought that the business had been con-
cases. This is where the offeror makes an offer on his siderably undervalued. In March 1987, the claimants and
own pre-printed standard form which contains certain defendants reached a ‘subject to contract’ agreement
terms, and the offeree accepts on his own standard form for the sale of the business. The defendants asked for
which contains conflicting terms. a letter, known as a ‘comfort letter’, from the claimants’
bankers confirming that they would provide the finance
Butler Machine Tool Co v Ex-Cell-O for the deal and in return the defendants promised to ter-
Corp (England) (1979) minate negotiations with any third parties. The comfort
letter was provided as agreed but the defendants sold the
The claimants offered to supply a machine tool to the business to the company which had made the unsuc-
defendants for £75,535. However, the quotation included cessful offer in 1985. The claimants sued for breach of
a term which would entitle the sellers to increase this an implied term to negotiate in good faith. The House of
price (price-variation clause). The defendants accepted Lords held that an agreement to negotiate is unenforce-
the offer on their own standard terms which did not pro- able because it lacks the requirement of certainty. In this
vide for any variation of their quoted price. The claimants case no time limit was given for exclusive negotiations.
acknowledged the order. When the machine was deliv- Their Lordships indicated, however, that it would be
ered, the claimants claimed an extra £2,892 which the possible to enter into a binding ‘lock-out’ agreement, i.e.
defendants refused to pay. The Court of Appeal held that an agreement to deal exclusively with one party and not
the defendants had not unconditionally accepted the to consider other offers for a limited period. The Court of
original offer. They had made a counter-offer which had Appeal upheld such an agreement in Pitt v PHH Asset
been accepted by the claimants. The defendants’ terms Management Ltd (1993) (discussed later in this chapter).
governed the contract. The claimants’ action to recover
the increase in price, therefore, failed. Method of acceptance

One form of conditional acceptance is the use of the An acceptance may take any form. It can be given orally
phrase ‘subject to contract’ in negotiations involving or in writing but silence cannot normally amount to an
the sale of land. These words usually mean that the acceptance.
parties do not intend to be bound at that stage. How-
ever, if there is clear evidence of a contrary intention, a Felthouse v Bindley (1862)
court may be prepared to find that a contract has been
concluded despite the use of the customary words ‘sub- The claimant had been negotiating to buy his nephew’s
ject to contract’ (Alpenstow Ltd v Regalian Properties horse. He eventually wrote to his nephew: ‘If I hear no
plc (1985)). The advantage of ‘subject to contract’ agree- more about him, I shall consider the horse is mine at
ments is that they allow either party to withdraw from £30 15s.’ The nephew did not reply to this letter but he
the agreement at any time and for any reason without did ask the auctioneer, who had been engaged to sell all
facing an action for breach of contract. The problem his farming stock, to keep the horse out of the sale, as
is that the parties may incur considerable expense on he had sold it to his uncle. The auctioneer by mistake
negotiations which do not ultimately result in a contract included the horse in the sale and was sued by the uncle
being formed. Some legal systems overcome this prob- in the tort of conversion. The basis of the uncle’s claim
lem by imposing a duty to negotiate in good faith. Eng- was that the auctioneer had sold his property. The court
lish law, however, does not recognise such a duty and an held that the uncle had no claim. Although the nephew
agreement to negotiate will not be binding. had mentally accepted the offer, some form of positive
action was required for a valid acceptance. Since there

212

Chapter 7 Introduction to the law of contract

was no contract between the uncle and nephew, owner- Examples of acceptance by conduct include returning
ship of the horse had not passed to the uncle. a lost dog in a reward case, or using a smoke ball in the
prescribed manner in Carlill v Carbolic Smoke Ball Co.
Comment. This case established the principle that the Examples of more recent cases involving an offer being
offeree’s silence or failure to act cannot constitute a valid accepted by conduct include Day Morris Associates v
acceptance. The rule has a particularly useful application Voyce (2003) in which the Court of Appeal held that the
to the problem of ‘inertia selling’. This is where a trader claimant estate agent’s offer to market the defendant’s
sends unsolicited goods to a person’s home, stipulat- house was accepted by the conduct of the defendant,
ing that if he does not receive a reply within a specified which consisted of her acquiescence in the process of
time, he will assume that his offer to sell the goods has marketing the property. The defendant was liable to
been accepted and the indicated price is payable. The pay commission in relation to the subsequent sale. In
Felthouse rule makes it clear that a recipient of goods in Confetti Records v Warner Music UK Ltd (t/a East West
these circumstances is not obliged to pay, because his Records) (2003), Confetti Records sent to Warner Music
silence or inaction cannot amount to an acceptance. Many a copy of a track called ‘Burnin’ and an invoice for an
people, however, have paid up in ignorance of the law. advance payment (the offer) which Warner accepted by
their conduct of including the track on a compilation
More effective control of ‘inertia selling’ was intro- album. Confetti’s attempt to revoke the offer came too
duced in the form of the Unsolicited Goods and Services late as Warner’s had already incurred the expense of
Act 1971, which has now been updated and extended by producing the album.
the Consumer Protection (Distance Selling) Regulations
2000 (SI 2000/2334). The regulations outlaw the supply of An offeror may state that the acceptance must be in
unsolicited goods and services to consumers. The recipient a particular form. It follows that the offeror’s wishes
of unsolicited goods may treat them as an unconditional should be respected. So if he asks for an acceptance in
gift. It is also an offence to make a demand for payment writing, a verbal acceptance by telephone will not be
from a consumer for unsolicited goods or services. valid. Sometimes the offeror may say ‘reply by return
post’, when he really means ‘reply quickly’ and a tele-
Felthouse v Bindley would seem to suggest that only phone call would be acceptable. Provided that the
an oral or written acceptance will be valid. However, chosen method of acceptance fulfils the intentions of the
acceptance may be implied from a person’s conduct. offeror, it will be binding.

Brogden v Metropolitan Railway Co Yates Building Co Ltd v R J Pulleyn &
(1877) Sons (York) Ltd (1975)

Brogden had supplied the railway company with coal for The vendors of a piece of land stated that an option to
many years without the benefit of a formal agreement. buy it should be exercised by ‘notice in writing . . . to be
Eventually the parties decided to put their relationship on sent registered or recorded delivery’. The acceptance
a firmer footing. A draft agreement was drawn up by the was sent by ordinary post. The Court of Appeal held that
company’s agent and sent to Brogden. Brogden filled the vendor’s intention was to ensure that they received
in some blanks, including the name of an arbitrator, written notification of acceptance. The requirement to use
marked it as ‘approved’ and returned it to the company’s registered or recorded delivery was more in the nature of
agent who put it in his drawer. Coal was ordered and a helpful suggestion than a condition of acceptance.
supplied in accordance with the terms of the ‘agree-
ment’. However, a dispute arose between the parties Communication of acceptance
and Brogden refused to supply coal to the company,
denying the existence of a binding contract between The general rule is that an acceptance must be com-
them. The House of Lords held that a contract had been municated to the offeror, either by the offeree himself
concluded. Brogden’s amendments to the draft agree- or by someone authorised by the offeree. The contract
ment amounted to an offer which was accepted by the is formed at the time and place the acceptance is re-
company either when the first order was placed under ceived by the offeror. If the post, however, is the anticip-
the terms of the agreement or at the latest when the coal ated method of communication between the parties,
was supplied. By their conduct the parties had indicated then acceptance is effective immediately the letter of
their approval of the agreement.
213

Part 3 Business transactions

acceptance is posted. Provided the letter is properly fendants had broken their contract and wished to serve
stamped, addressed and posted, the contract is formed a writ (now claim form) on them, which they could do if
on posting, even if the letter is delayed or never reaches the contract was made in England. The Court of Appeal
its destination. This special rule was established in 1818. held in favour of the claimants. The decision of the court
was expressed by Parker LJ in the following terms:
Adams v Lindsell (1818) ‘So far as Telex messages are concerned, though the
despatch and receipt of a message is not completely
On 2 September 1817 the defendants who were wool instantaneous, the parties are to all intents and purposes
traders based in Huntingdon wrote to the claimants, who in each other’s presence just as if they were in telephonic
were woollen manufacturers in Bromsgrove, offering to communication, and I can see no reason for departing
sell them some wool and asking for an answer ‘in course from the general rule that there is no binding contract
of post’. This letter was wrongly addressed and as a until notice of the acceptance is received by the offeror.
result it did not reach the claimants until 5 September. That being so, and since the offer . . . was made by the
The same day the claimants posted a letter of accept- [claimants] in London and notification of the acceptance
ance which reached the defendants on 9 September. was received by them in London, the contract resulting
The evidence was that if the offer letter had been cor- therefrom was made in London.’ The approach of the
rectly addressed a reply ‘in course of post’ could have Court of Appeal was confirmed by the House of Lords in
been expected by 7 September. On 8 September the Brinkibon v Stahag Stahl (1982).
defendants sold the wool to someone else. It was held
that the contract was formed when the claimants posted Comment. The decisions of the Court of Appeal and
their letter of acceptance. In reaching this conclusion the House of Lords in Entores and Brinkibon respectively
court may have been influenced by the fact that it was were considered by Mann J in Apple Corps Ltd v Apple
the defendants’ misdirection of the offer letter which led Computers, Inc (2004), a case which required the court
to the delayed acceptance. to decide where a contract had been formed. The con-
tract had been completed during the course of a transat-
Household Fire Insurance Co v Grant lantic telephone conversation between parties in London
(1879) and California, but the judge was unable to say precisely
which party had made the offer and which accepted. He
held that in principle it is possible for a contract to be
made in two (or more) places at once.

Grant applied for shares in the claimant company. A Acceptances sent by electronic means are likely to be
letter of allotment was posted but Grant never received treated in the same way as telephone or telex accept-
it. When the company went into liquidation, Grant was ances; the seller’s acceptance will only be effective when
asked, as a shareholder, to contribute the amount still received by the customer. The problem of applying this
outstanding on the shares he held. The Court of Appeal approach to e-commerce is that if a seller is doing busi-
held that Grant was a shareholder of the company. The ness with customers based in different countries, the
contract to buy shares was formed when the letter of contract will be formed in the country (and jurisdiction)
allotment (acceptance) was posted. where the customer is based. E-traders can avoid these
difficulties by confirming customers’ orders by e-mail
The ‘postal rules’ have been applied to acceptances by and asking the customer to confirm the purchase by
telegram but not to more instantaneous methods of clicking on a confirmation button. The effect of these
communication such as telex and telephone. precautions is that the contract will be concluded at the
seller’s place of business.
Entores v Miles Far East Corp (1955)
Clearly, the ‘postal rules’ are a potential problem for
The claimants, a London company, made an offer to the an offeror: if the letter of acceptance is lost in the post,
defendants’ agents in Amsterdam by means of a telex the offeror may be unaware that a binding contract has
message. The Dutch agents accepted the offer by the been formed. An offeror can protect himself by spe-
same method. The claimants later alleged that the de- cifically stating that the acceptance is only complete when
received on or before a certain date.

214

Chapter 7 Introduction to the law of contract

Holwell Securities v Hughes (1974) able appropriate, effective and accessible means to allow
the recipient to identify and correct input errors before
Dr Hughes had agreed to grant Holwell Securities Ltd an placing the order. Acknowledgement of the order is
option to buy his premises. The option, which would deemed to be received only when the recipient is able to
constitute the acceptance, was exercisable ‘by notice in access it. A consumer will be entitled to rescind a con-
writing’ to the doctor within six months. The company tract where the service provider has not made available
posted a letter of acceptance but it was never delivered. the means of identifying and correcting input errors.
The Court of Appeal held that no contract had been Other breaches of the regulations may give rise to an
formed. Since Dr Hughes had stipulated actual ‘notice’ action in damages for breach of statutory duty against
of the acceptance, the postal rules did not apply. The the service provider.
acceptance would only be effective when received by
the doctor. Consideration

Note that the postal rules only apply to the commun- On the previous pages we have seen how an agreement
ication of acceptances: offers and revocations of offers is formed – the requirements of offer and acceptance –
must be communicated to be effective. but the mere fact of an agreement alone does not make
a contract. The law concerns itself with bargains. This
The Electronic Commerce (EC Directive) Regulations means that each side must promise to give or do some-
2002 (SI 2002/2013) provide a legal framework for the thing for the other, although it does not appear to be a
conclusion of contracts by electronic means. The regu- requirement that the parties must be conscious that they
lations, which came into force in August 2002, apply are providing a benefit or suffering a detriment (Pitts v
to on-line trading and advertising using the Internet, e- Jones (2007)).
mail or mobile phones. This kind of business is referred
to as ‘information society services’. The regulations pro- The element of exchange is known as ‘consideration’
tect consumers but may apply to business customers and is an essential element of every valid simple con-
unless they agree otherwise. Regulation 9 provides that tract. A promise of a gift will not be binding unless made
where a contract is to be concluded by electronic means in the form of a deed. Consideration can take two forms:
(but not by exchange of e-mails), the service provider executed or executory. What is the difference between
must, prior to an order being placed, provide to the them?
recipient (the consumer) the following information in
a clear, comprehensible and unambiguous manner: 1 Executed consideration is where one party promises
to do something in return for the act of another, e.g.
■ the different technical steps to follow to conclude the reward cases.
contract;
Promise Act
■ whether the concluded contract will be filed by the
service provider and whether it will be accessible; £10 reward offered for the David sees the advert in
return of ‘Lucky’ – black the local paper. He finds
■ the technical means for identifying and correcting and white cat. Ring Mrs the cat, returns it to Mrs
input errors before the order is placed; Smith (01308 215 8793). Smith and claims the
reward.
■ the languages offered for conclusion of the contract.
‘Cash with order’ terms are an example of executed
In addition, the service provider must: consideration.

■ indicate which relevant codes of conduct he sub-
scribes to and how they can be accessed electronically;

■ make available any terms and conditions, provided in
a way which allows the recipient to store and repro-
duce them.

If the recipient places an order electronically the service 2 Executory consideration is where the parties ex-
provider must acknowledge receipt of the order without change promises to perform acts in the future, e.g. ‘cash
undue delay and by electronic means and make avail- on delivery’ terms.

215

Part 3 Business transactions

Promise Act Re Casey’s Patents, Stewart v Casey
(1892)
Jones & Co Ltd promises Fastype Ltd promises
to pay £950 when a new to deliver the computer Casey agreed to promote certain patents which had
computer is delivered. within six weeks. been granted to Stewart and another. (A patent gives the
holder exclusive rights to profit from an invention.) Two
Rules governing consideration years later Stewart wrote to Casey promising him a one-
third share of the patents ‘in consideration’ of Casey’s
1 Consideration must not be in the past. If one party efforts. It was held that Stewart’s original request raised
voluntarily performs an act, and the other party then an implication that Casey’s work would be paid for. The
makes a promise, the consideration for the promise is later letter merely fixed the amount of the payment.
said to be in the past. Past consideration is regarded as
no consideration at all. 2 Consideration must move from the promisee. If
A (the promisor) makes a promise to B (the promisee),
Act Promise the promise will only be enforceable (unless made in
the form of a deed) if B can show that he has provided
John gives Susan On arrival, Susan offers John £1 consideration in return for A’s promise.
a lift home in his towards the petrol but, finding
car after work. that she has not got any change, Tweddle v Atkinson (1861)
she says she will give him the
money the next day at work. John Tweddle and William Guy agreed that they would
pay a sum of money to Tweddle’s son, William, who had
In this example, John cannot enforce Susan’s promise to married Guy’s daughter. William Guy died without paying
pay £1 because the consideration for the promise (giving his share and William Tweddle sued his late father-in-
the lift) is in the past. John would have given Susan the law’s executor (Atkinson). His claim failed because he had
lift home without expecting payment and so there was not provided any consideration for the promise to pay.
no bargain between the parties.
The rule that consideration must move from the
Re McArdle (1951) promisee is closely related to the doctrine of privity of
contract. This doctrine states that a person cannot be
Mr McArdle died leaving a house to his wife for her life- bound by or take advantage of a contract to which he
time and then to his children. While Mrs McArdle was still was not a party. The doctrine of privity of contract and
alive, one of the children and his wife moved into the the exceptions to the rule, including the recent changes
house. The wife made a number of improvements to the contained in the Contracts (Rights of Third Parties) Act
house costing £488. After the work had been completed, 1999, will be examined in more detail later in this
all the children signed a document in which they pro- chapter . It should be noted at this point, however,
mised to reimburse the wife when their father’s estate that the 1999 Act does not change the requirement that
was finally distributed. The Court of Appeal held that this the promisee must show consideration to enforce any
was a case of past consideration. The promise to pay promise not made in the form of a deed.
£488 to the wife was made after the improvements had
been completed and was, therefore, not binding. 3 Consideration must not be illegal. The courts will
not entertain an action where the consideration is con-
The rule about past consideration is not strictly fol- trary to a rule of law or is immoral. The question of
lowed. If, for example, a person is asked to perform a legality will be considered in more detail later in this
service, which he duly carries out, and later a promise to chapter .
pay is made, the promise will be binding.
4 Consideration must be sufficient but need not be
adequate. It must be possible to attach some value to
the consideration but there is no requirement for the

216

bargain to be strictly commercial. If a man is prepared to Chapter 7 Introduction to the law of contract
sell his Jaguar car for £1, the contract will not fail for lack
of consideration. The courts will not help someone who Glasbrook Bros Ltd v Glamorgan
complains of making a bad bargain. County Council (1925)

The following are examples of cases where the con- Glasbrook Bros were the owners of a strike-hit mine.
sideration was of little value, but, nevertheless, it was They asked for police protection for the safety of men
held to be sufficient. whose presence was necessary to prevent the mine flood-
ing. They were unhappy with the arrangements originally
Thomas v Thomas (1842) offered by the local police. Eventually it was agreed that
70 policemen would be stationed in the colliery and that
After the death of her husband, Mrs Thomas agreed to Glasbrook Bros would pay for this extra security. The
pay rent of £1 a year in order to continue living in the House of Lords held that, since the police had provided
same house. It was held that the payment of £1 was more protection than they thought necessary, this con-
valid consideration. stituted consideration. They were entitled to payment.

Chappell & Co Ltd v Nestlé Co Ltd (1959) Comment. Glasbrook v Glamorgan was considered
by the Court of Appeal in upholding a claim by a police
authority for £51,699 against Sheffield United Football
Club for special police services provided at the club’s
home matches between August 1982 and November
1983 (Harris v Sheffield United Football Club (1987)).

Nestlé was running a special offer whereby members Similar principles apply where a person is bound by
of the public could obtain a copy of the record ‘Rockin’ a pre-existing contractual duty.
Shoes’ by sending off three wrappers from Nestlé’s six-
penny chocolate bars, plus 1s 6d. The records had been Stilk v Myrick (1809)
made by Hardy & Co but the copyright was owned by
Chappell & Co Ltd, which claimed that there had been During the course of a voyage from London to the Baltic
breaches of its copyright. The case turned round whether and back, two of a ship’s crew deserted. The captain
the three wrappers were part of the consideration. The promised to share the wages of the deserters amongst
House of Lords held that they were – even though they the remaining crew. It was held that this promise was not
were thrown away when received. In the words of Lord binding as the sailors were already contractually bound
Somervell, ‘A peppercorn does not cease to be good to meet such emergencies of the voyage. They had not
consideration if it is established that the promisee does provided consideration.
not like pepper and will throw away the corn.’

A person who promises to carry out a duty which he The decision in Stilk v Myrick was reconsidered by
is already obliged to perform is in reality offering noth- the Court of Appeal in the following case.
ing of value. The ‘consideration’ will be insufficient.
However, if a person does more than he is bound to do, Williams v Roffey Bros & Nicholls
there may be sufficient consideration. The promise may (Contractors) Ltd (1990)
involve a public duty imposed by law.

Collins v Godefroy (1831) The defendant building contractors had a contract to
refurbish a block of 27 flats. They had sub-contracted the
Collins was subpoenaed to give evidence in a case in carpentry work to Williams for £20,000. After the contract
which Godefroy was a party. (A subpoena is a court had been running some months, during which time
order which compels a person’s attendance at court.) Williams had completed nine flats and received some
Godefroy promised to pay 6 guineas for Collins’ loss of £16,200 on account, it became apparent that Williams
time. Collins’ action to recover this money failed because had underestimated the cost of the work and was in
he was already under a legal duty to appear in court. He financial difficulties. The defendants, concerned that the
had not done anything extra. carpentry work would not be completed on time and that
as a result they would fall foul of a penalty clause in their

217

Part 3 Business transactions

main contract, agreed to a further £575 per flat. Williams Foakes v Beer (1884)
completed eight more flats but did not receive full
payment. He stopped work and brought an action for Mrs Beer had obtained judgment for a debt against
damages. The defendants argued that they were not Dr Foakes. She agreed that she would take no further
obliged to pay as they had promised Williams extra pay action in the matter, provided that Foakes paid £500
for something he was already contractually bound to do, immediately and the rest by half-yearly instalments of
i.e. complete the work. Williams in turn submitted that £150. Foakes duly kept to his side of the agreement.
the defendants obtained a benefit in that they had Judgment debts, however, carry interest. The House of
avoided a penalty for late completion and did not have Lords held that Mrs Beer was entitled to the £360 interest
the expense of engaging another contractor. The Court which had accrued. Foakes had not ‘bought’ her promise
of Appeal held that Williams was entitled to the extra to take no further action on the judgment. He had not
payments. Where A promises additional payments to B provided any consideration.
in return for B’s promise to complete work on time, and
by giving this promise A obtains a benefit by avoiding a The decision in Foakes v Beer was reconsidered by the
penalty clause, for example, then B’s promise may con- Court of Appeal in the following case.
stitute sufficient consideration to support A’s promise of
extra pay, provided A’s promise has not been obtained Re Selectmove Ltd (1995)
as a result of fraud or economic duress (see p 239 ).
Selectmove owed the Inland Revenue large sums of tax
Comment. Doubt has been cast over the correctness of and national insurance. In July 1991, Selectmove’s man-
the decision in Williams. In South Caribbean Trading aging director suggested to a collector of taxes that the
Ltd v Trafigura Beeher BV (2004) Colman J sitting in the company should pay future income tax and national in-
Commercial Court noted that the decision in Williams is surance contributions as they became due and clear the
inconsistent with the long standing rule that considera- arrears at £1,000 per month from 1 February 1992. The
tion must move from the promise. However, but for the collector said that he would have to obtain approval for
fact that Williams is a Court of Appeal decision, which this proposal and that he would come back to the com-
has not yet been held by the House of Lords to have pany if it was not acceptable. Selectmove heard no more
been wrongly decided, the judge stated that he would from the Inland Revenue until 9 October 1991, when the
not have followed it. Revenue demanded payment of the arrears in full and
threatened to present a winding-up petition. The ques-
Hartley v Ponsonby (1857) tion was whether the proposal made by Selectmove’s
managing director in July had become a binding agree-
When almost half of the crew of a ship deserted, the ment. It was argued on behalf of Selectmove that the
captain offered those remaining £40 extra to complete decision in Williams v Roffey Bros was authority for the
the voyage. In this case, the ship was so seriously under- proposition that a promise to perform an existing obliga-
manned that the rest of the journey had become ex- tion can amount to good consideration provided that
tremely hazardous. It was held that this fact discharged there are practical benefits to the promisee. The Court of
the sailors from their existing contract and left them free Appeal held that the Williams principle, which related to
to enter into a new contract for the rest of the voyage. a case involving the supply of services, should not be
extended to a situation involving an obligation to make
A slightly different problem arises where a person a payment which is clearly governed by the authority of
agrees to accept a smaller sum of money as full payment the House of Lords in Foakes v Beer. The court concluded
under a contract to pay a larger amount. For example, that, if there was an agreement between Selectmove
what is the legal position if Derek owes Graham £100, and the Inland Revenue, it was unenforceable because
but Graham says that he will accept £90 in full settle- of the absence of consideration.
ment? Can Graham change his mind and sue for the
outstanding £10? The long-established common law There are some exceptions to the rule.
rule, known as the rule in Pinnel’s Case (1602), is that an
agreement to accept a lesser sum is not binding unless 1 If the smaller payment is made, at the creditor’s
supported by fresh consideration. request, at an earlier time, at a different place, with an
additional item or by a different method, consideration

218

Chapter 7 Introduction to the law of contract

has been shown. It should be noted that payment by 3 A promise to accept a smaller sum in full satisfaction
cheque rather than by cash does not necessarily release will be binding on a creditor where the part payment is
a debtor from his obligation to pay the full amount. made by a third party on condition that the debtor is
released from the obligation to pay the full amount
Stour Valley Builders v Stuart (1993) (Hirachand Punamchand v Temple (1911)).

The claimants were a small firm of builders. They carried 4 The final exception is provided by equity. You will
out some work for Mr and Mrs Stuart. On completion remember from Chapter 1 that equity is a system of
of the work, the claimants submitted a bill which, after law based on the idea of fairness and doing right accord-
deductions for payments on account, came to £10,204. ing to conscience. The rule about part payment would
Following a query by Mr Stuart, the bill was revised to seem an ideal candidate for intervention by equity. It
£10,163. Mr Stuart continued to dispute an amount of seems very unfair that a court will support a person who
£3,000 but made an offer to settle of £8,471. He wrote to has gone back on his word, especially where the agree-
the claimants enclosing a cheque for £8,471 ‘in full and ment to accept a lesser amount has been relied upon.
final settlement’. The claimants paid the cheque in to The equitable rule of promissory estoppel which was
their bank account but, after seeking advice from their developed by Denning J in the High Trees case may pro-
solicitor the following day, contacted Mr Stuart to say vide some assistance.
that they would not accept the cheque in full settlement.
The Court of Appeal held that although cashing in of a Central London Property Trust Ltd v
cheque is strong evidence of agreement, if, as in this High Trees House Ltd (1947)
case, the banking of the cheque was closely followed
by a rejection of the offer to settle, there could be no In 1937 the claimants granted a 99-year lease on a block
‘accord and satisfaction’ so as to discharge the debt. of flats in London to the defendants at an annual rent of
£2,500. Owing to the outbreak of war in 1939, the defend-
Comment. Another example of this principle can be ants found it very difficult to get tenants for the flats and
found in the decision of the High Court in Inland so in 1940 it was agreed that the rent should be reduced
Revenue Commissioners v Fry (2001). Mrs Fry owed the to £1,250. By 1945 the flats were full again and the
Inland Revenue £113,000. Her husband wrote to the claimants sued to recover the arrears of rent as fixed by
Revenue enclosing a cheque for £10,000. He stated that the 1937 agreement for the last two quarters of 1945.
if the Revenue presented the cheque for payment it Denning J held that they were entitled to recover this
would be taken as acceptance of the offer of £10,000 in money, but if they had sued for the arrears from 1940–
full and final settlement of Mrs Fry’s liabilities. Unknown 45, the 1940 agreement would have defeated their claim.
to Mr Fry, the procedure in the Revenue’s post room was The defendants had relied upon the reduction in rent and
to send all cheques to the cashier’s section for banking equity would require the claimants to honour the
and to send any correspondence to the appropriate promises contained in the 1940 agreement.
caseworker. As soon as Mr Fry’s letter reached the
caseworker, she telephoned Mr Fry to say that although Thus, it seems that if a person promises that he will
the cheque had been banked his offer to settle had not not insist on his strict legal rights, and the promise
been accepted. The High Court held that the encash- is acted upon, then the law will require the promise to
ment of the cheque by the Revenue had not discharged be honoured even though it is not supported by
Mrs Fry from the obligation to pay the full amount. consideration.
As Jacob J put it: the ‘Cashing of a cheque gives rise to
no more than a rebuttable presumption of acceptance The following points should be noted about promis-
of the accompanying letter. That presumption is fully sory estoppel:
rebutted here’.
1 The rule can only be used as a defence and not as
2 The rule does not apply to a composition agreement. a cause of action. In the words of Birkett LJ in Combe
This is where a debtor agrees with all his creditors to pay v Combe (1951), promissory estoppel must be ‘used as
so much in the £ of what he owes. Provided that the a shield and not as a sword’. Consideration is still an
debtor honours the agreement, a creditor cannot sue for essential requirement for the formation of a contract.
any outstanding sum. The principle was confirmed in the following Court of
Appeal case.

219

Part 3 Business transactions

Baird Textile Holdings Ltd v Marks and to succeed. Mr Rees could not rely on promissory estop-
Spencer (2002) pel to resist the claim because his wife had held the
company to ransom and could not be said to have acted
The claimant B had supplied garments to the defendants equitably. Moreover, the different method of payment,
M & S for 30 years, when M & S terminated the agree- i.e. by cheque rather than by cash, did not release
ment with effect from the end of the then current Mr Rees from the obligation to pay the full amount owed.
production season. B brought an action against M & S
arguing that: (i) the termination was in breach of a con- 4 The rule does not as yet extinguish rights: it only sus-
tract, which could be implied from the long-standing pends the rights of the promisor. So if the promise refers
relationship between the parties, that obliged M & S to to a particular period of time or a state of affairs (e.g.
continue to place orders unless and until the contract war conditions), the promisor can revert to the original
was ended by giving reasonable notice, and B contended position at the end of the stated time or when conditions
that a notice period of at least three years was reasonable; change by giving notice to the promisee.
and (ii) M & S were estopped from giving less than three
years’ notice. The Court of Appeal held that the alleged Tool Metal Manufacturing Co Ltd v
contract obliging M & S to continue to place orders with Tungsten Electric Co Ltd (1955)
B failed for uncertainty. (The requirement of certainty will
be discussed in more detail in Chapter 9 .) The court Tool Metal granted a licence to Tungsten Electric to deal
confirmed that estoppel did not create the type of enfor- in products protected by patents owned by Tool Metal.
ceable right claimed by B. It could not be used to found Tungsten Electric agreed to pay ‘compensation’ if it
a cause of action. manufactured more than a specific amount. In 1942 Tool
Metal indicated that it wished to prepare a new licence
2 The rule will only operate if the promisee has relied agreement and in the meantime would not claim com-
upon the promise so that it would be inequitable to pensation. Tool Metal later gave notice that it wished to
allow the promisor to insist on his strict legal rights. At resume its claim to compensation. The House of Lords
first it was thought that the promisee must have acted to held that Tool Metal was entitled to claim compensation
his detriment. However, Lord Denning MR argued that after giving reasonable notice of its intention to do so.
detrimental reliance is not essential and that it is suffici-
ent that the promisee has altered his position by acting The Court of Appeal had a recent opportunity to con-
differently from what he otherwise would have done. sider the rule in Pinnel’s case and the doctrine of pro-
missory estoppel in the following case.
3 It is a principle of equity that whoever seeks the help
of equity must himself have acted equitably or fairly. Collier v P & M J Wright (Holdings)
Thus, the promisee must have acted according to his Ltd (2007)
conscience if he is to rely on promissory estoppel as
a defence.

D & C Builders v Rees (1965) C and his two partners B and F, had obtained a loan
from W, for which the partners were jointly liable. W
D & C Builders, a small building company, had com- obtained a judgment against C, B and F for £46,800 in
pleted some work for Mr Rees for which he owed the 1999. The partners were ordered to pay £600 a month
company £482. For months the company, which was in and initially the payments were made from the partners’
severe financial difficulties, pressed for payment. Even- joint bank account. However, the partnership came to an
tually, Mrs Rees, who had become aware of the com- end in 2000. At a meeting between C and W towards the
pany’s problems, contacted the company and offered end of 2000, W told C that B and F had not been paying
£300 in full settlement. She added that if the company their shares. C alleged that when he asked W what he
refused this offer, it would get nothing. The company should do, W said that it was his (W’s) responsibility to
reluctantly accepted a cheque for £300 ‘in completion of pursue B and F and that C should carry on paying £200
the account’. The company later sued for the balance. per month. C continued making monthly payments for
The Court of Appeal held that the company was entitled the next five years until he had paid one-third of the total
judgment debt. In 2006, W served a statutory demand

220

Chapter 7 Introduction to the law of contract

on C for the outstanding balance. Meanwhile, B and F below the list price. Selfridge sold some of the tyres
had been declared bankrupt in 2002 and 2004 respect- below list price and Dunlop sued for breach of contract.
ively. C applied to have the statutory demand set aside Selfridge argued that they were not a party to a contract
on the following grounds: with Dunlop. The House of Lords held that, as there was
no contract between Dunlop and Selfridge, Dunlop could
1 that the agreement he made in 2000 was binding, not enforce the penalty of £5 for every tyre sold below
because by accepting sole responsibility for a one- Dunlop’s list price. Viscount Haldane based his decision
third share of the debt, he gave consideration for W’s on two principles: first, that only a person who is party to
promise to accept him as a debtor of one-third share a contract can sue on it; and second, in order to enforce
of the judgment debt; a simple contract, a person must provide consideration.

2 that W was estopped from proceeding against him for Comment. The agreement between Dunlop and Dew
more than one-third of the judgment debt. and Co is known as a resale price maintenance agree-
ment. Such agreements are now outlawed by Art 81 of
The Court of Appeal applied the rule in Pinnel’s case to the EC Treaty and s 2 of the Competition Act 1998. UK
hold that the 2000 agreement between C and W was not and EC competition law will be considered in more detail
binding. However, all three Lord Justices agreed that C later in this chapter .
had raised a triable issue as to promissory estoppel. In
the words of Arden LJ,

if (1) a debtor offers to pay part only of the amount he If A enters into a contract with B for the benefit of C,
owes; (2) the creditor voluntary accepts that offer; and (3) the common law doctrine of privity prevents C from
in reliance of the creditor’s acceptance the debtor pays suing B on the contract. There is nothing to stop A from
that part of the amount he owes in full, the creditor will by suing on behalf of C, but the question arises whether A
virtue of the doctrine of promissory estoppel, be bound to is limited to recovering damages only for his own loss,
accept that sum in full and final satisfaction of the whole or can he also recover for losses suffered by C?
debt. For him to resile will of itself be inequitable. . . . in
these circumstances, the promissory estoppel has the
effect of extinguishing the creditor’s right to the balance
of the debt.

These comments are obiter dicta as the Appeal Court Jackson v Horizon Holidays Ltd (1975)
was not trying the substantive issue, only considering
whether C had raised a triable issue. Mr Jackson entered into a contract with Horizon for a
four-week family holiday to Ceylon for £1,200. The holi-
Privity of contract day was a disaster. Mr Jackson was awarded £1,100 for
breach of contract by the Court of Appeal. The damages
The common law doctrine of privity of contract states covered not only his own distress and disappointment
that a person cannot be bound by, or take advantage of, but also that suffered by his wife and children. Although
a contract to which he is not a party. The doctrine, the outcome in this case can be justified by saying that
which had been developed by the common law judges the damages were compensation for his own distress
by the middle of the 19th century, was reaffirmed by the because his family’s holiday had been ruined, Lord Denn-
House of Lords in 1915. ing made it clear that the award was designed to cover
not only Mr Jackson’s loss but also the loss suffered by
his wife and children.

Dunlop Pneumatic Tyre Co Ltd v The House of Lords expressed disapproval of Lord
Selfridge & Co Ltd (1915) Denning’s reasoning in the Jackson case in Woodar
Investment Development Ltd v Wimpey Construction
The claimants, Dunlop, sold a quantity of tyres to Dew UK Ltd (1980), but gave its support for the level of dam-
and Co, dealers in motor accessories, on the basis that ages awarded. More recently the House of Lords has
Dew and Co would not sell the tyres below the claimants’ shown that it is prepared in limited circumstances to
list price and they would obtain a similar undertaking from allow a party to a contract to recover damages which
anyone they supplied with tyres. Dew and Co sold tyres represent a third party’s loss.
to the defendants, Selfridge, which agreed to observe
the restrictions and to pay Dunlop £5 for each tyre sold

221

Part 3 Business transactions 4 Trusts. The doctrine of privity does not apply to the
law of trusts. If X and Y by contract create a trust for the
Linden Garden Trust Ltd v Lenesta benefit of B, B can enforce his rights under the trust even
Sludge Disposals Ltd (1993) though he was not a party to the contract.

The owner of land entered into a building contract with a 5 Collateral contract. A collateral contract may arise
contractor to develop a site for shops, offices and flats. where one party makes a promise to another, the con-
The parties envisaged that the site would subsequently sideration for which is that the promisee will enter into
be transferred to a third party. It was alleged that the a contract with a third party. The device of a collateral
third party had suffered financial loss as a result of the contract was often used to enforce a promise made by
contractor’s poor workmanship which amounted to a car dealers before a purchaser entered into a hire-
breach of contract. The owner of the site brought an purchase agreement with a finance company.
action for breach of contract but was met by the defence
that as the site had been transferred to a third party he Andrews v Hopkinson (1956)
had only suffered nominal loss. The House of Lords
rejected this argument and upheld the right of the owner
to recover full damages on behalf of the third party.

Although privity of contract has been regarded as a The defendant car dealer recommended a car to the
fundamental principle of English law, there is a large claimant saying: ‘It’s a good little bus. I would stake my
number of exceptions to the rule. Where an exception life on it.’ The claimant entered into a hire-purchase
applies, a person who is not a party to a contract may be agreement with a finance company and when the car
able to take legal action. was delivered he was asked to sign a delivery note which
said that he was satisfied with its condition. This was the
1 Assignment of contractual rights. It is possible for first opportunity the claimant had to examine the vehicle.
a party to a contract to transfer the benefit of a contract The claimant was seriously injured when a week later
to another person. For example, A may agree to sell B his the car suddenly swerved into a lorry. The car was com-
CD collection for £2,000. A may transfer his right to pletely wrecked. A subsequent examination revealed
payment under the contract to a third party, C. This that the steering mechanism was faulty at the time of
process is known as assignment. Provided the assign- delivery. As the law then stood, the delivery note may
ment is absolute, in writing and notice is given to the have barred the claimant from suing the finance com-
debtor, it will take effect as a statutory assignment under pany. The claimant successfully sued the defendant for
s 136 of the Law of Property Act 1925. This means that breach of the promise made before he entered into the
the assignee (C in the example above) can sue the debtor hire-purchase agreement. The defendant was also liable
(B) in his own name. The assignee gets the same rights in the tort of negligence.
as the assignor (A) had. The burden of a contract cannot
be assigned unless the other party consents. 6 Other causes of action. The doctrine of privity of con-
tract means that a person who is not a party to a contract
2 Agency. An agent is a person who is employed by cannot bring an action in contract. He may have some
a principal to make contracts on his behalf with third other cause of action on which to base a claim. If a hus-
parties. A principal will be bound by contracts made by band enters into a contract with a garage to have his
the agent with the third party even if the existence of the wife’s car serviced, she will not be able to sue the garage
agency is not revealed. This is known as the doctrine of in contract if the service is carried out badly. However,
the undisclosed principal. if she is injured in an accident caused by a defective ser-
vice to the car’s brakes, she may be able to sue the garage
3 Land law. There are many situations in land law in the tort of negligence (see Chapter 11 ).
where the doctrine of privity of contract does not apply.
For example, a lease of property often contains a num- Beswick v Beswick (1967)
ber of covenants by the landlord and the tenant. If the
tenant assigns the lease to a third party, either party, Peter Beswick was a coal merchant. He agreed to sell
landlord or new tenant may enforce a covenant in the the business to his nephew, John, provided that John
original lease against each other. paid him £6.50 per week for the rest of his life and if his

222

Chapter 7 Introduction to the law of contract

wife survived him she would receive an annuity of £5 per Avraamides v Colwill (2006)
week. John took over the business and paid the agreed
sum to Peter until Peter died. John paid Peter’s widow C had purchased a business from B Ltd. The transfer
for one week but then refused to make any more pay- agreement provided that C undertook to complete out-
ments. Peter’s widow sued John for specific perform- standing customer orders and to pay any liabilities
ance of the contract and arrears of the annuity. She properly incurred by the company. A was a dissatisfied
sued in her personal capacity and as administratrix of customer of B Ltd and brought a claim against C based
her husband’s estate. The House of Lords held that she on the contract between B Ltd and C, claiming that the
was entitled to succeed in her capacity as administratrix transfer agreement had conferred an enforceable bene-
but privity of contract would prevent her from succeed- fit on C. The Court of Appeal held that under s 1(3) of the
ing in her personal capacity. Contracts (Rights of Third Parties) Act 1999, the contract
must expressly identify third parties by name or class
7 Contracts (Rights of Third Parties) Act 1999. In and no such identification had occurred in this case.
1996 the Law Commission recommended that the doc-
trine of privity be relaxed to allow a person who is not a The right of a third party to enforce a contract is
party to a contract to sue on it, provided that the con- subject to the terms and conditions of the contract. It is,
tract contains an express term to that effect and it pur- therefore, open to the contracting parties to limit or
ports to confer a benefit on the third party. These impose conditions on the rights of the third party to
recommendations have now been implemented by the enforce the contract.
Contracts (Rights of Third Parties) Act 1999.
The third party is entitled to all the remedies for a
The 1999 Act institutes reform of the doctrine of priv- breach of contract which would have been available to
ity by recognising the right of third parties to enforce him if he had been a party to the contract. The rules
contracts which have been made for their benefit. It relating to damages (including the duty to mitigate loss),
should be noted that the Act applies only to contracts for injunctions, specific performance and other types of
the benefit of third parties and does not affect the estab- remedy will all apply.
lished principle that burdens cannot be imposed on a
third party without his consent. Although the Act is primarily designed to enable third
parties to enforce positive rights, it also allows third
The main provisions of the Contracts (Rights of Third parties to take advantage of any exclusion or limitation
Parties) Act 1999 are set out below. clauses in the contract. The effect of the Act on exemp-
tion clauses will be examined further in Chapter 9 .
Right of a third party to enforce a term of
a contract (s 1) For the purposes of the Act, the ‘promisor’ is defined
as the party to the contract against whom the contrac-
A third party will have the right to enforce a term of a tual term is enforceable by the third party, while the
contract: ‘promisee’ is the party to the contract by whom the term
is enforceable against the promisor. So if A makes a
■ where the contract expressly so provides; contract with B, by which B agrees to confer a benefit on
■ where the term purports to confer a benefit on the C, B is the ‘promisor’, A is the ‘promisee’, and C is the
‘third party’.
third party, unless it appears that the contracting par-
ties did not intend him to have the right to enforce Applying the provisions of the Act to the facts of
the term. Beswick v Beswick (above), it is probable that if the case
arose today Mrs Beswick would have the right to enforce
The third party must be expressly identified in the John Beswick’s promise to pay her an annuity. The con-
contract either by name, e.g. Fred Smith; class, e.g. Fred tract between Peter Beswick and his nephew John pur-
Smith’s employees; or description, e.g. Fred Smith’s ported to confer a benefit (the payment of an annuity)
son. It is not necessary, however, for the third party to be on Mrs Beswick, who was expressly named. Under s 1 of
in existence when the contract is made. This provision the 1999 Act, a presumed right of enforceability by Mrs
allows the contracting parties to confer enforceable rights Beswick would be created, which could only be rebutted
on, for example, a company which, although in the pro- if John Beswick could show ‘on a proper construction of
cess of formation, has not yet been incorporated.

223

Part 3 Business transactions

the contract that the parties did not intend the term to or in connection with the contract and relevant to the

be enforceable by a third party’. term the third party is seeking to enforce (s 3(2)).

Variation and rescission of the contract (s 2) Example 1

The effect of this section is to restrict attempts by the The contract is void because of mistake or illegality, or
contracting parties to alter (vary) the contract or cancel has been discharged because of frustration, or is unen-
(rescind) it without the agreement of the third party. forceable because of a failure to observe necessary form-
Where a third party has a right under s 1 to enforce a alities. In these circumstances the third party will not be
term of a contract, the contracting parties may not, by able to enforce the term because the promisee would
agreement, rescind or vary the contract in such a way as not have been able to enforce the contract.
to extinguish or alter the third party’s entitlement, with-
out the third party’s consent if:

■ the third party has communicated to the promisor Example 2
his/her acceptance of the term; or
A and B enter into a contract for the sale of goods,
■ the promisor is aware that the third party has relied whereby the purchase price is to be paid to C. B delivers
on the term; goods which are not of satisfactory quality in breach of
the statutory implied term contained in s 14 of the Sale of
■ the promisor can reasonably be expected to have Goods Act 1979. In an action for the price of the goods
foreseen that the third party would rely on the term brought by C, A will be entitled to reduce or extinguish
and the third party has in fact relied on the term. the price because of B’s breach of contract.

Acceptance may be in the form of words or conduct, 2 The contracting parties may include an express term
but if the acceptance is sent by post, the ‘postal rules’ will in the contract to the effect that the promisor may have
not apply and the acceptance will only be effective when available to him any matter by way of defence or set-off
received by the promisor. in proceedings brought by the third party or the pro-
misee (s 3(3)).
The principle that variation or rescission of the con-
tract can only be made with the third party’s consent
will not apply in the following circumstances:

■ Where there is an express term in the contract allow- Example
ing the contracting parties to vary or rescind without
the third party’s consent. A agrees to buy B’s car for £3,000, with the purchase
price to be paid to C. B owes A money under a com-
■ Where, on the application of the contracting parties, pletely unrelated contract. A and B agree to an express
a court dispenses with the requirement of consent term in the contract for the sale of the car that allows
because the third party’s whereabouts are unknown A to raise in any claim brought by C any matter which
or he is incapable of giving consent because of mental would have given A a defence or set-off in a claim
incapacity or it cannot be ascertained whether he has brought by B. So if C brought a claim for the purchase
relied on the contractual term. This power is exercis- price, A would be able to set off the money owed by B.
able by either the High Court or county court.

Defences, set-off or counterclaims available 3 The promisor will also have available to him any
to the promisor (s 3) defence or set-off, or any counterclaim not arising from
the contract, but which is specific to the third party
This section applies where the third party is seeking to (s 3(4)).
enforce a contractual term against the promisor. It sets
out the defences, set-offs and counterclaims available to Example 1
the promisor in any proceedings by the third party. The
following principles apply: A enters into a contract with B whereby A will pay C
£1,000. C already owes A £400. A has a set-off to a claim
1 The third party’s claim will be subject to all the by C and need only pay £600.
defences and set-offs which would have been available to
the promisor in an action by the promisee arising from

224

Chapter 7 Introduction to the law of contract

Example 2 ■ contracts of employment: without this provision,
employees taking lawful industrial action would be at
C induces A to enter into a contract with B by misrep- risk of being sued for breach of their contracts of
resentation, but B is unaware of the misrepresentation. A employment by customers of any employer;
may have a defence (or a counterclaim for damages) if
sued by C, which would not have been available if the ■ contracts for the carriage of goods by sea; however,
action had been brought by B. third parties will be able to take advantage of any
exclusion or limitation clauses made for their benefit
4 The contracting parties may include an express pro- in such contracts.
vision to the effect that the promisor cannot raise any
defences, set-offs or counterclaims that would have been The application of the Act to exemption clauses will
available to the promisor had the third party been party be discussed in more detail in Chapter 9 .
to the contract (s 3(5)).
Supplementary provisions (s 7)
Example The section clarifies that any existing rights or remedies
available to a third party are not affected by the Act.
B agrees to buy a painting from A, an art dealer, for his
daughter C’s birthday. C is expressly given the right to It also prevents a third party from invoking s 2(2) of
enforce delivery of the painting. B already owes a con- the Unfair Contract Terms Act 1977 to contest the valid-
siderable amount of money for other works of art he has ity of an exemption clause which purports to exclude or
purchased. B is concerned that C’s right to enforce the limit liability for negligently caused loss and damage
contract is unaffected and so A and B agree that A can- (other than death or personal injury). The Unfair Con-
not raise against C any defences or set-offs which would tract Terms Act will be considered in more detail in
have been available to A in any action by B. Chapter 9 .

Enforcement by the promisee (s 4) Intention
This section makes it clear the rights given to third par-
ties under the Act are in addition to any rights that the So far we have established two requirements for a bind-
promisee has to enforce the contract. This means that in ing contract: agreement and consideration. The law
a contract between A and B for the benefit of C, B can demands, in addition, that the parties intended to enter
sue on behalf of C. into a legal relationship. After all, if you invite a friend
round for a social evening at your house, you would not
Protection against double liability (s 5) expect legal action to follow if the occasion has to be
This section provides that where the promisee has cancelled. So how does the law decide what the parties
already recovered damages from the promisor in respect intended? For the purpose of establishing the intention
of the third party’s loss, in a claim against the promisor of the parties, agreements are divided into two categories:
by the third party, any award will be reduced to take into business/commercial and social/domestic agreements.
account sums already recovered. This section is designed
to protect the promisor against double liability. Business/commercial agreements
In the case of a business agreement, it is automatically
Exceptions (s 6) presumed that the parties intended to make a legally
This section excludes certain kinds of contracts from the enforceable contract. It is possible, however, to remove
operation of the Act. Third parties acquire no rights of the intention by the inclusion of an express statement to
enforcement in relation to the following contracts: that effect in the agreement.

■ contracts on a bill of exchange, promissory note or Rose and Frank Co v Crompton (J R) &
other negotiable instruments; Brothers Ltd (1923)

■ contracts under s 33 of the Companies Act 2006, by The defendants, English paper tissue manufacturers,
which a company’s constitution is deemed to constitute entered into an agreement with the claimants, an
a contract between the company and its members; American company, whereby the claimants were to act
as sole agents for the sale of the defendants’ tissues in

225

Part 3 Business transactions

the USA. The written agreement contained the following 3 Public bodies. Where one of the parties is a public
‘Honourable Pledge Clause’: body which is bound by Act of Parliament to supply
a particular service, there is no intention to enter into a
This arrangement is not entered into . . . as a formal or contract with customers. For example, if you post a letter
legal agreement and shall not be subject to legal jurisdic- by ordinary first class mail and it is delayed or lost, you
tion in the law courts . . . but it is only a definite expression cannot sue the Post Office for breach of contract.
and record of the purpose and intention of the parties
concerned to which they honourably pledge themselves 4 Letters of comfort. A comfort letter is a document
that it will be carried through with mutual loyalty and supplied by a third party to a creditor, indicating a con-
friendly co-operation. cern to ensure that a debtor meets his obligations to the
creditor. Comfort letters are sometimes provided as
The claimants placed orders for tissues which were ac- an alternative to a formal guarantee in respect of a loan
cepted by the defendants. Before the orders were sent, but are usually carefully worded so as to avoid the crea-
the defendants terminated the agency agreement and tion of any legal obligation. In Kleinwort Benson Ltd
refused to send the tissues. The House of Lords held v Malaysian Mining Corporation Bhd (1989) the Court
that the sole agency agreement was not binding owing of Appeal held that, despite the commercial nature of
to the inclusion of the ‘honourable pledge clause’. Insofar the transaction which gave rise to a presumption of
as orders had been placed and accepted, however, con- an intention to create legal relations, the comfort letter
tracts had been created and the defendants, in failing to provided by Malaysian Mining merely stated its current
execute them, were in breach of contract. policy and did not amount to a contractual promise to
meet the liabilities of its subsidiary.
When the parties enter into an agreement subject to
contract, they are expressly stating that they will not be 5 Letters of intent. A letter of intent is a device by which
bound unless and until a formal contract is drawn up. one person indicates to another that he is likely to place a
contract with him, but is not yet ready to be contractually
There are situations where it would appear at first bound. A typical example of a situation where a letter of
sight that the parties had entered into a commercial intent might be provided is where a main contractor is
arrangement, but, nevertheless, a contract is not created. preparing a tender and he plans to subcontract some of
the work. He would need to know the cost of the sub-
1 Collective agreements. Employers and trade unions contracted work in order to calculate his own tender, but
regularly enter into collective agreements about rates of would not want to be committed to that subcontractor
pay and conditions of employment. Section 179 of the until he knows whether his tender has been successful.
Trade Union and Labour Relations (Consolidation) Act In these circumstances, the main contractor writes to tell
1992 states that such agreements are not intended to be the subcontractor that he has been chosen. Normally, the
legally enforceable unless they are in writing and letter is carefully worded so as to avoid any legal obliga-
expressly affirm that they are to be binding. It should be tions. However, if the letter of intent invites the sub-
noted, however, that the Employment Relations Act contractor to begin preliminary work, an obligation to
1999 inserted a new s 70A in the 1992 Act, which deals pay for the work will arise even though a formal contract
with recognition of trade unions. Under s 70A, agree- may never be concluded (British Steel Corporation v
ments between an employer and a trade union about the Cleveland Bridge and Engineering Co Ltd (1984)).
method by which they will conduct collective bargaining
(or if not agreed by the parties, specified by the Central Social/domestic arrangements
Arbitration Committee) will take effect as if they were
contained in a legally enforceable contract. The only Social arrangements between friends do not usually
remedy for breach is specific performance. amount to contracts because the parties never intend
their agreement to be legally binding. You might agree
2 Advertisements. Generally speaking, vague promises to meet someone for lunch or accept an invitation to a
or guarantees given in the course of promoting a prod- party, but in neither case have you entered into a con-
uct are not intended to be taken seriously. By contrast, tract. If it can be shown, however, that the transaction
more specific pledges such as, ‘If you can find the same had a commercial flavour, the court may be prepared to
holiday at a lower price in a different brochure, we will find the necessary intention for a contract.
refund you the difference’, are likely to be binding. (See
Carlill v Carbolic Smoke Ball Co.)

226

Chapter 7 Introduction to the law of contract

Simpkins v Pays (1955) remuneration would not be increased to match that of
the transferred manager, he resigned, claiming construct-
The claimant, Simpkins, lodged with the defendant, Mrs ive dismissal in that CL was in breach of contract by not
Pays, and her granddaughter. Each week all three ladies fulfilling the promises made at the Christmas Party. The
jointly completed a competition run by a Sunday new- Court of Appeal upheld the decision of the EAT which
spaper. The entries were sent off in the defendant’s name. held that, even if the alleged promise had been made at
One entry won a prize of £750 which the defendant the Christmas Party, it had been made during the course
refused to share with the claimant. It was held that the of a casual conversation at a social event and, given the
parties had embarked on a joint enterprise, expecting to ‘convivial spirit of the evening’, there was no intention to
share any prize money. There was an intention to enter create a legally binding contract.
into a legal relationship and the claimant was entitled to
one-third of the winnings. Form

Most domestic arrangements within families are not If you ask someone what a contract is, you will probably
intended to be legally binding. An agreement between be told that it is a written document. Some contracts are
husband and wife or parent and child does not normally indeed in writing but the majority are created much
give rise to a contract. That is not to say that there can more informally either orally or implied from conduct.
never be business contracts between members of a fam-
ily. Many family businesses are run as partnerships; a Generally, the law does not require complex formal-
wife can be employed by her husband. ities to be observed to form a contract. There are, however,
some types of contract which are exceptions to this rule.
If the husband and wife are living apart, they can
make a binding separation agreement. 1 Contracts which must be in the form of a deed.
Certain transactions involving land require the execu-
Merritt v Merritt (1970) tion of a deed, i.e. conveyances, legal mortgages and
leases for more than three years. A promise of a gift is
Mr Merritt had left his wife to live with another woman. not binding unless in this form.
He agreed that if his wife completed the mortgage re-
payments on the matrimonial home he would transfer 2 Contracts which must be in writing. The Law of
the house to her. Mrs Merritt duly completed the repay- Property (Miscellaneous Provisions) Act 1989 provides
ments but her husband refused to convey the house to that a contract for the sale or other disposition of land
her. The Court of Appeal held that, as the parties were can only be made in writing and by incorporating all the
living apart, the agreement was enforceable. terms which the parties have expressly agreed in one
document, or, where the contracts are exchanged, in
The context in which a promise is made might indic- each. The document must be signed by or on behalf of
ate that it was not intended to be legally binding. each party to the contract.

Judge v Crown Leisure Ltd (2005) In the following case the Court of Appeal considered
whether the formalities required for the sale of land
J was employed as an Operations Manager for CL. He under the 1989 Act applied to a so-called ‘lockout’ agree-
was paid substantially less than a new office manager, ment, i.e. an agreement to deal exclusively with one party
who had been recruited from CL’s sister company. (The and not to consider other offers for a limited period.
reason for the differential was that the incoming manager
had received assurances that his remuneration would Pitt v PHH Asset Management Ltd (1993)
not be reduced.) A senior manager at CL had informed
all the operation managers that their remuneration would The claimant, Mr Pitt, and a Miss Buckle were both inter-
be brought into line. J claimed that the senior manager ested in purchasing a cottage in Suffolk from the defend-
promised at CL’s Christmas Party in 2001 that J would ant, PHH Asset Management. Every time Mr Pitt made
be put onto the same scale as the transferred manager an offer for the property, he was gazumped by Miss
within two years. When J was told subsequently that his Buckle. On the occasion of Mr Pitt’s third offer for the

227

Part 3 Business transactions

property, it was agreed orally that PHH would not con- of written evidence does not affect the formation of such
sider any further offers, provided that Mr Pitt exchanged contracts. The absence of writing does not make the
contracts within two weeks. PHH sold the cottage to agreement void, so, if any money or property has changed
Miss Buckle at a higher price before the two-week hands, it can be kept. However, if one of the parties
period had expired. Mr Pitt sued PHH for breach of the wishes to enforce the contract in the courts, the neces-
‘lock-out’ agreement. PHH argued that the agreement sary note or memorandum must be produced.
was unenforceable on three grounds: (i) the agreement
formed part of the continuing negotiations for the sale Actionstrength Ltd v International Glass
of the property and as such was ‘subject to contract’; Engineering & Saint-Gobain Glass
(ii) the agreement was a contract for the sale of an inter- UK Ltd (2003)
est in land and was, therefore, only enforceable if the form-
alities required by the Law of Property (Miscellaneous Saint-Gobain Glass (SGG) had retained International
Provisions) Act 1989 were observed; and (iii) Mr Pitt had Glass Engineering (IGE) as the main contractor to build a
given no consideration for the agreement. The Court of new factory. IGE engaged Actionstrength (AS) to supply
Appeal held that PHH was in breach of contract and was labour. The contract between IGE and AS entitled AS to
liable to pay damages. The court said that the lock-out terminate the contract with 30 days’ notice if invoices
agreement was capable of existing independently of any were not paid. IGE fell behind on payments and AS
agreement to sell the cottage and was, therefore, not threatened to withdraw from the contract. SGG allegedly
‘subject to contract’. The 1989 Act did not apply either, then made an oral promise to AS that if IGE did not
for the same reason. The court found that Mr Pitt had settle the invoices, SGG would pay them. AS continued
provided consideration in the form of removing a threat working but, when IGE did not pay, AS sought to enforce
to make difficulties for Miss Buckle and in promising to SGG’s promise to pay. SGG defended the claim by argu-
exchange contracts within two weeks. ing that its oral guarantee could not be enforced because
it had not been evidenced in writing. The House of Lords
Under the Bills of Exchange Act 1882, bills of exchange, held that SGG’s oral guarantee was unenforceable
cheques and promissory notes must be in writing. Sim- because it had not been evidenced in writing as required
ilarly, the transfer of shares in a limited company must by s 4 of the Statute of Frauds 1677.
be in writing. Regulations introduced under the Consu-
mer Credit Act 1974 lay down requirements about the Formalities and electronic communications
form and content of regulated consumer credit and hire
agreements. The Employment Rights Act 1996 requires At the start of the third millennium, we find ourselves
that employees be given a written statement of the terms in the midst of a new industrial revolution. It is widely
and conditions of employment within two months of predicted that the rapid development of electronic com-
starting work. Failure to provide a written statement munication technology will revolutionise the way
does not affect the validity of a contract of employment, in which business is conducted in the future. Although
although it does entitle an employee to refer the matter e-commerce currently accounts for a very small pro-
to an employment tribunal. The tribunal can decide on portion of transactions in the UK, the government
the particulars which should have been included in the recognises the enormous potential for electronic trad-
written statement. An example of a possible form of ing and has set itself the ambitious target of making the
written statement may be seen in Chapter 16 . UK the best place in the world to trade electronically.
The Electronic Communications Act 2000 is designed to
3 Contracts which must be evidenced in writing. There facilitate the development of electronic commerce by
is only one type of contract which must be evidenced providing for:
in writing: s 4 of the Statute of Frauds 1677 requires a
contract of guarantee to be evidenced in writing. If you ■ a voluntary registration system for organisations pro-
borrow money or buy goods on credit, you may be viding cryptography support services, such as elec-
asked to find someone who will guarantee the debt. This tronic signature and confidentiality services;
means that if you do not or cannot repay the money, the
guarantor will pay your debt for you. The requirement ■ legal recognition of electronic signatures;
■ the removal of obstacles in other legislation to the use

of electronic communication and electronic storage
in place of paper. (It should be noted that the Law

228

of Property (Miscellaneous Provisions) Act 1989 has Chapter 7 Introduction to the law of contract
already abolished the requirement that a deed must
be written on paper.) The power to modify legislation Nash v Inman (1908)
to facilitate the use of electronic communications or
electronic storage will be exercisable by ministerial A Saville Row tailor sued an infant Cambridge student
order. for the price of clothes (including 11 fancy waistcoats) he
had supplied. The tailor failed in his action because the
student was already adequately supplied with clothes.

Capacity A minor is also bound by contracts of employment,
apprenticeship and education, which, taken as a whole,
‘If there is one thing which more than another public are for his or her benefit.
policy requires it is that men of full age and competent
understanding shall have the utmost liberty of contract- Roberts v Gray (1913)
ing and their contracts when entered into freely and vol-
untarily shall be held sacred and shall be enforced by The infant defendant had agreed to go on a world tour
courts of justice.’ (Sir George Jessel, 1875) with the claimant, a professional billiards player. After the
claimant had spent much time and some money organis-
This classic statement of freedom of contract by a ing the tour, the infant changed his mind and refused to
19th-century Master of the Rolls still essentially holds go. The claimant sued for breach of contract. The Court
good today – it is assumed that everyone is capable of of Appeal held that this was essentially a contract to
entering into a contract. There are, however, some receive instruction. Since this was for the infant’s bene-
groups of people who are in need of the law’s protection fit, the contract was valid. The claimant was awarded
either because of their age or inability to appreciate their £1,500 damages.
own actions. The groups which are covered by special
rules are those under the age of 18 (minors), mental Comment. A more recent application of these principles
patients and drunks. can be found in a case involving the footballer, Wayne
Rooney. In Proform Sports Management Ltd v Proactive
Minors Sports Management Ltd (2006), Hodge J held that there
was no real prospect that the claimant Proform would
Before 1970 anyone under the age of 21 was known as succeed in establishing that an agreement concluded in
an infant. The age of majority was lowered to 18 on 2000 when Rooney was 15, whereby the claimant would
1 January 1970 and ‘infants’ were renamed ‘minors’. act as the player’s executive agent and personal rep-
The rules relating to contractual capacity are designed to resentative, fell within the type of contracts analogous
protect the minor from exploitation by adults. A minor to contracts for necessaries, contracts of employment,
is free to enter into contracts and enforce his rights apprenticeship or education. For the duration of the
against an adult. The adult’s rights will depend on the agreement, Rooney was playing for Everton and the
way in which the contract is classified. claimants did not undertake any activities essential to his
training. As the judge notes: ‘Players’ representatives do
1 Valid contracts. There are two types of contract not undertake matters that are essential to the player’s
which will bind a minor: contracts for necessary goods training or his livelihood. They do not enable the minor to
and services and beneficial contracts of service. A minor earn a living or to advance his skills as a professional
must pay a reasonable price for ‘necessaries’ sold and footballer.’
delivered to him or her. Section 3 of the Sale of Goods
Act 1979 defines ‘necessaries’ as ‘goods suitable to the If the minor sets himself up in business, he will not be
condition in life of the minor and to his actual require- bound by his trading contracts, even though they are for
ments at the time of sale and delivery’. Clearly, luxury his benefit. The minor can, none the less, sue on these
goods are excluded. Expensive but useful items may be contracts.
necessaries if they are appropriate to the social back-
ground and financial circumstances of the minor. If the
minor is already adequately supplied, the goods will not
be classed as necessaries.

229

Part 3 Business transactions

Cowern v Nield (1912) Contracts which are neither valid nor voidable do not
bind the minor but are binding on the other party. As
Nield was an infant hay and straw dealer. He refused to has been noted above, a minor may be bound by such
deliver a quantity of hay which had been paid for by a contract if he ratifies it, either expressly or impliedly,
Cowern. It was held that, provided the infant had not on reaching 18. Although the minor can enforce the
acted fraudulently, he was not liable to repay Cowern. contract against the other party, his remedies are limited
since he will not be able to obtain an order of specific
2 Voidable contracts. There are three kinds of contract performance because of lack of mutuality.
which are voidable: leases of land, partnerships and the
purchase of shares. Voidable means that the contract is Once the contract has been performed by the minor,
binding on the minor until he decides to reject it. He he or she cannot recover money paid or property trans-
must repudiate the contract before becoming 18 or ferred under the contract except in the same circum-
within a reasonable time of reaching 18. The main effect stances in which such a remedy would be available to
of repudiation is to relieve the minor of all future liabil- an adult, i.e. where there has been a total failure of con-
ities, but he can be sued for liabilities which have already sideration. The case of Stocks v Wilson (1913) and s 3(1)
accrued, such as arrears of rent. of the MCA 1987 support the view that a minor acquires
title (rights of ownership) to any property transferred to
3 Other contracts. Before looking at how the law deals the minor under such a contract. Similarly, a minor can
with other contracts made by minors, we will consider transfer title in property under a non-binding contract.
the effect of changes introduced by the Minors’ Con- A minor may be liable to restore certain benefits which
tracts Act 1987 (MCA 1987). The law concerning con- he has received under a contract which does not bind
tracts made by minors used to be governed mainly by him. Section 3(1) of the MCA 1987 provides that where
the Infants Relief Act 1874. Section 1 of the 1874 Act a contract has been made with a minor which is unen-
provided that contracts for the repayment of money lent forceable against him, or he has repudiated it, because
or to be lent, contracts for the supply of non-necessary he was a minor, the court may, if it thinks it just and
goods and accounts stated were ‘absolutely void’. equitable to do so, require him to return the property or
Section 7 placed a bar on enforcement proceedings any property representing that which he has acquired.
against a minor who ratified a contract on reaching 18 The scope of the statutory remedy is as follows:
unless the ratification was contained in a new contract
for which fresh consideration had been provided. (a) The minor can be made to return the goods and
money which he still has in his possession. So if Seb-
The MCA 1987 implements the recommendations of astian, age 17, acquires a case of champagne on credit
the Law Commission contained in its 1984 Report on and fails to pay he can be required to return the goods to
Minors’ Contracts. Section 1 disapplies the Infants Relief the seller.
Act 1874 to contracts made in England and Wales after
9 June 1987 (and by a subsequent Order, to contracts (b) If the minor has exchanged the original goods for
in Northern Ireland from 26 July 1988). The result is to other property, the court may require him to hand over
restore the application of the common law rules to such the goods received in exchange. So if Sebastian, in the
contracts. In particular, a contract made by a minor, example above, has bartered a bottle of champagne for
which is later ratified by the minor on reaching 18, is a dozen quail’s eggs, the seller of the champagne may be
now enforceable against the minor without the need for able to recover the quail’s eggs.
a fresh contract. Section 2 makes any guarantee support-
ing a loan to a minor enforceable against the adult guar- (c) If the minor has sold the original goods for cash,
antor, thus reversing the position established in Coutts he can be ordered to hand over the sale proceeds. So if
& Co v Browne-Lecky (1946). Section 3 improves the Sebastian sold the case of champagne for cash, he could
remedies available to an adult who has contracted with be required to hand over the money to the seller.
a minor. We shall now examine in more detail the com-
bined effect of the common law and the MCA 1987. (d) If the minor has consumed or disposed of the goods,
or the proceeds of any sale of the goods, he cannot be
made to compensate the other party. So if Sebastian
drank the champagne or used the proceeds of any sale

230

Chapter 7 Introduction to the law of contract

of the champagne to pay for an evening at a night-club, Mistake
he could not be required to compensate the unpaid
seller. The general rule of common law is that a mistake does
not affect the validity of a contract. The guiding prin-
Section 3(2) of the MCA 1987 expressly preserves the ciple is caveat emptor, which means ‘let the buyer beware’.
remedies which were available before the MCA was So if a person agrees to pay £1,000 for a car, when in
passed. The equitable doctrine of restitution allows an reality it is worth only £500, the contract is valid and he
adult to recover money or property acquired by a minor or she must stand the loss. A mistake as to the quality of
as a result of fraud. The remedy is confined to restitution the thing contracted for will not enable a party to escape
of the actual property acquired. Thus, if a minor has from the contract.
parted with the goods or the precise notes and coins, this
remedy is not available. In practice, adults seeking re- Bell v Lever Bros Ltd (1932)
stitution are likely to base their claims on the statutory
remedy contained in s 3(1) since it is not subject to the
same limitations which apply to the equitable remedy.

Drunks and mental patients B and S had entered into five-year contracts to act as
chairman and vice-chairman respectively of a company
Section 3 of the Sale of Goods Act 1979 provides that in which LB Ltd had a controlling interest. LB Ltd wished
they are required to pay a reasonable price for neces- to dispense with their services and, because they still
saries in the same way as minors. Other kinds of con- had some time to run on their contracts, it was agreed
tract are governed by common law. If a person is that B and S would receive £30,000 and £20,000 respect-
suffering from mental disability or drunkenness at the ively for loss of office. Unknown to LB Ltd, B and S had
time of making the contract, he will be able to avoid his been engaged in activities which would have entitled LB
liabilities if he can show that he did not understand what Ltd to terminate their contracts without compensation for
the agreement was about and the other person was breach of contract. LB Ltd sought to recover the money
aware of his disability. it had paid to B and S on the ground that the agreement
to pay them compensation was void for mistake. The
The judges of the Court of Protection may exercise House of Lords held by a majority of three to two that
wide powers over the property and affairs of mental this was a case of common mistake, i.e. both parties had
patients placed in their care under the Mental Health made the same mistake. (B and S had managed to con-
Act 1983. They can make contracts on behalf of the vince a jury that when they had agreed to compensation
patient and carry out contracts already made by him. for loss of office, they had forgotten about their previous
misconduct. Both parties thought B and S were entitled
The Mental Capacity Act 2005 establishes a new stat- to compensation.) LB Ltd got what it bargained for – the
utory framework to protect adults who lack mental termination of B’s contract and S’s contract. LB Ltd was
capacity and are unable to make their own decisions. mistaken about the qualities of B and S, but this kind of
Section 7 of the 2005 Act provides that a person lacking mistake does not invalidate a contract.
capacity must pay for necessary goods and services. The
Act came into force on 1 April 2007. Comment. In 1949 in Solle v Butcher Denning LJ in the
Court of Appeal argued that in cases of common mistake
Genuineness of consent where the contract is valid at common law, a court may
intervene and rescind the agreement on terms in exercise
The most basic requirement of a contract is the pre- of its equitable jurisdiction. In a more recent case the
sence of an agreement. It must have been entered into Court of Appeal reviewed the apparent conflict between
voluntarily and involved ‘a genuine meeting of minds’. the decision of the House of Lords in Bell and the
The agreement may be invalidated by a number of approach taken by the Court of Appeal in Solle. In Great
factors – mistake, misrepresentation, duress and undue Peace Shipping Ltd v Tsavliris (International) Ltd (2002),
influence. the defendants offered to provide salvage services to a
ship called the Cape Providence which had got into diffi-
culties in the South Indian Ocean. They asked hirers (H)
to find a vessel which was close to the Cape Providence

231

Part 3 Business transactions 1 Mistakes as to the subject matter of the contract.
The parties may be mistaken as to the identity of the
and willing to assist with the evacuation of the crew. H subject matter. If a seller makes an offer in respect of one
was advised that the Great Peace was the nearest thing and the buyer accepts, but is thinking of some-
vessel, and on this basis entered into a charter with the thing else, the parties are clearly talking at cross-
owners of the Great Peace for a minimum of five days purposes and there is no contract.
while it diverted to help the Cape Providence. After the
contract was concluded, the defendants discovered that Raffles v Wichelhaus (1864)
the Great Peace was 400 miles away from the Cape
Providence and there was another vessel much closer. The defendant agreed to buy cotton which was described
The defendants refused to pay for the hire of the Great as ‘arriving on the Peerless from Bombay’. There were
Peace on the grounds that the charter was void at com- two ships called the Peerless sailing from Bombay: one
mon law for mistake and/or the charter was voidable for in October and the other in December. It was held that
a ‘common’ mistake and could be rescinded in equity. there was no binding contract between the parties as the
The Court of Appeal held this was a case of common defendant meant one ship and the claimant the other.
mistake as in Bell. The court took the view that it was not
possible to reconcile Solle with Bell and the previous When the parties contract in the mistaken belief that
decision of the Court of Appeal in Solle should be dis- a particular thing is in existence, but in fact it has ceased
regarded. In the present case, the distance between the to exist, the contract is void. These situations are known
two vessels was not so great as to confound the com- as cases of res extincta.
mon assumption of both parties that the vessels were
sufficiently close to each other to allow the Great Peace Couturier v Hastie (1856)
to carry out the service for which she had been char-
tered. The contract for the hire of Great Peace was valid
and the defendants were liable to pay the hire charges.

Leaf v International Galleries (1950) A contract was made for the sale of Indian corn which the
parties believed to be on board a ship bound for the UK.
Mr Leaf bought a painting of ‘Salisbury Cathedral’ from Unknown to the parties, the corn had overheated during
International Galleries for £85. The gallery attributed the the voyage and been landed at the nearest port and sold.
painting to John Constable. When Leaf tried to sell the The House of Lords held that the agreement was void.
painting five years later, he was informed that it was not
by Constable. Both the buyer and seller had made a mis- The common law res extincta rules are reflected in the
take about the quality and value of the painting but this provisions of the Sale of Goods Act 1979. Section 6 pro-
did not affect the validity of the contract. vides: ‘where there is a contract for the sale of specific
goods and the goods without the knowledge of the seller
It used to be the case that a mistake of law would not have perished at the time when the contract is made, the
invalidate a contract on the basis that everyone is pre- contract is void’. In some situations, the non-existence
sumed to know the law (a principle expressed in the of the subject matter will not render the contract void. A
Latin as ignorantia juris non excusat). However, in court may be prepared to place responsibility for non-
Kleinwort Benson Ltd v Lincoln City Council (1998), the existence on one of the parties.
House of Lords took the view that ‘the rule precluding
recovery of money paid under a mistake of law could no McRae v Commonwealth Disposals
longer be maintained’ (see p 260 ) for a fuller discus- Commission (1951)
sion of the decision in Kleinwort).
The Commission contracted to sell to McRae the wreck
There are some kinds of mistake which so undermine of an oil tanker which was described as lying on Jour-
the agreement that the contract is void. If this is the case, mand Reef off Papua. McRae incurred considerable ex-
no rights of ownership can pass and any goods which penditure in preparation for the salvage operation. In
have changed hands can be recovered. A mistake will fact, there was no tanker anywhere near the specified
invalidate the contract in the following situations: location and no place known as Jourmand Reef. The

232

Chapter 7 Introduction to the law of contract

Figure 7.1 A typical mistaken identity case

High Court of Australia awarded damages to McRae for respectable firm. Lindsay & Co despatched the goods
breach of contract. It was held that the contract con- on credit to Blenkarn who resold 250 dozen to Cundy.
tained an implied promise by the Commission that there Blenkarn did not pay for the goods and was later con-
was a tanker at the stated location. victed of obtaining goods by false pretences. Lindsay &
Co sued Cundy for conversion. The House of Lords held
2 Mistake as to the identity of one of the parties. If one that the contract between Lindsay & Co and Blenkarn
party makes a mistake about the identity of the person was void for mistake. Lindsay & Co intended to deal with
he is contracting with, this may invalidate the contract. Blenkiron & Co, not the rogue, Blenkarn. Cundy was
A typical ‘mistaken identity’ case is where a crook (C) liable in conversion.
fraudulently represents to the owner of goods (O), that
he is someone else (X), and on this basis O hands over Where the parties have face-to-face dealings, the
his goods to C by way of a sale either on credit or in courts are likely to assume that the identity of the other
return for a (worthless) cheque. C sells the goods to an party is not material and that the mistaken party O
innocent buyer (B) and then disappears, pocketing the intends to contract with the person in front of him. In
proceeds of his deception. When the fraud is discovered, this situation the contract will be valid until O realises
O seeks to recover his goods from B by suing in the tort that he has been misled and avoids the contract for a
of conversion. This typical scenario is set out in Fig 7.1. fraudulent misrepresentation.

The courts have tended to take different approaches Phillips v Brooks Ltd (1919)
depending on whether the parties had face-to-face dealings
or agreement was reached by written correspondence. A man entered the claimant’s shop to buy some jew-
ellery. He selected various items of jewellery and offered
Where the parties have not met and the agreement to pay by cheque. While writing the cheque the man
has been concluded in writing, if the identity of the party said, ‘You see who I am, I am Sir George Bullough.’ He
contracted with is material to the contract, a mistake as gave an address in St James’s Square. The claimant
to identity will result in the contract being void. knew of a Sir George Bullough and, after checking in a
directory that Sir George had an address in St James’s
Cundy v Lindsay (1878) Square, he asked if the man would like to take the jew-
ellery with him. The man replied that the jeweller had
Lindsay & Co, Belfast linen manufacturers, received an better let the cheque clear first but he would like to take
order for a large quantity of handkerchiefs from a rogue the ring as it was his wife’s birthday the following day.
called Blenkarn. The rogue had signed his name in such
a way that it looked like ‘Blenkiron & Co’, a well-known,

233

Part 3 Business transactions

The cheque was dishonoured. The man, who was in fact as a dealer. R disappeared without trace. Shogun was
a rogue called North, pledged the ring with the defend- claiming the return of the car or its value from Hudson.
ant pawnbrokers. The claimant sued the defendants for Hudson argued that he had obtained good title to the car
the return of the ring or its value. It was held that the con- by virtue of the provisions of s 27 of the Hire Purchase
tract between the claimant and the rogue North was not Act 1964. The House of Lords held (by a majority of three
void for mistake but voidable for fraud. At the time the to two) that Shogun was entitled to recover the car. Lord
contract was made the claimant intended to deal with Phillips concluded that:
the person physically in his shop and his identity was
immaterial. As the claimant had not rescinded the con- the correct approach in the present case is to treat the
tract by the time North pledged the ring, the defendants agreement as one concluded in writing and to approach
obtained good title (rights of ownership). the identification of the parties to that agreement as turning
on its construction. The particulars in the agreement are
Lewis v Averay (1971) only capable of applying to Mr Patel. It was the intention
of the rogue that they should identify Mr Patel as the hirer.
Lewis sold his car to a man who claimed he was Richard The hirer was so identified by Shogun. Before deciding
Greene, the star of the popular 1960s television series, to enter into the agreement they checked that Mr Patel
‘Robin Hood’. The man paid by cheque, producing a existed and that he was worthy of credit. On that basis
pass to Pinewood Studios as proof of his identity. He they decided to contract with him and with no-one else.
resold the car to Averay. The cheque had been taken Mr Patel was the hirer under the agreement. As the agree-
from a stolen cheque book and was later dishonoured. ment was concluded without his authority, it was a nullity.
Lewis sued Averay in the tort of conversion. The Court of The rogue took no title under it and was in no position to
Appeal held that Lewis intended to deal with the man convey any title to Mr Hudson.
actually in front of him, despite his fraudulent claim to be
Richard Greene. The contract between Lewis and the Lords Nicholls and Millett, dissenting, took the view that
rogue was not void for mistake, but rather voidable for in cases of mistaken identity the distinction between
a fraudulent misrepresentation. Since Lewis had not face-to-face dealings and transactions concluded in
avoided the contract by the time the rogue sold the car writing should be removed and a person should be pre-
to Averay, Averay acquired good rights of ownership. He sumed to contract with the person with whom he or she
was not liable in conversion. was actually dealing. In their minority judgment their
Lordships preferred the decisions of Phillips v Brooks
The ‘mistaken identity’ cases were recently reviewed and Lewis v Averay to Cundy v Lindsay.
by the House of Lords in the following case.
3 Mistaken signing of a written document. As a gen-
Shogun Finance Ltd v Hudson (2004) eral rule, a person who signs a document is assumed to
have read, understood and agreed to its contents.
A fraudster R obtained P’s driving licence by dishonest Exceptionally, a person may be able to plead non est fac-
means. R visited the showrooms of a car dealer, where tum – ‘it is not my deed’. Three elements must be pre-
he introduced himself to the sales manager as Mr Durlabh sent if the contract is to be avoided: the signature must
Patel. R agreed to buy a Mitsubishi Shogun car for have been induced by fraud, the document signed must
£22,250, subject to obtaining hire-purchase finance. R be fundamentally different from that thought to be
completed a hire-purchase proposal form in the name of signed, and the signer must not have acted negligently.
Mr Patel. The sales manager contacted Shogun Finance’s
sales support team, which ran a check on the details of Saunders v Anglia Building Society
Mr Patel provided by R. Shogun was satisfied with the (1971)
information provided and it accepted the hire-purchase
proposal. R paid a 10 per cent deposit, partly in cash Mrs Gallie was a 78-year-old widow. In June 1962 she
and partly by cheque. The cheque was subsequently was visited by her nephew, Walter Parkin, and a Mr Lee.
dishonoured. The sales manager handed over the car Lee asked her to sign a document, which he told her was
with full documentation. R sold the car to Mr Hudson for a deed of gift of her house to her nephew Walter. Mrs
£17,000. Hudson bought the car for his own use and not Gallie had broken her spectacles and, as she could not
read without them, she signed the document without
reading it through. The document which Mrs Gallie
signed was in fact an assignment of her leasehold inter-
est in the house to Lee. The Anglia Building Society

234

Chapter 7 Introduction to the law of contract

advanced £2,000 to Lee on the strength of the deed. George Wimpey UK Ltd v VI
Mrs Gallie brought an action against Lee and the build- Construction Ltd (2005)
ing society claiming that the deed was void. She pleaded
non est factum. She succeeded at first instance against Wimpey had entered into a contract to buy land from VI
both Lee and the building society. However, the building Construction for the development of residential flats.
society won on appeal to the Court of Appeal. Then Mrs During the negotiations, it had been understood that
Gallie died and an appeal to the House of Lords was Wimpey would pay an ‘overage payment’ if the overall
brought by Mrs Saunders, the executrix of her estate. sale prices of the flats exceeded a base amount and a
The House of Lords held that the plea of non est factum formula was proposed which took into account the value
must fail. Although her signature had been induced by of enhancements to each flat (referred to as ‘+ E’). How-
fraud, the document she signed was not fundamentally ever, the contract omitted ‘+ E’. The omission benefited
different from that which she thought she had signed. VI Construction by approximately £800,000. Wimpey
Moreover, persons wishing to plead non est factum must brought an action against VI Construction for rectifica-
show that they exercised reasonable care in signing. Mrs tion of the contract based on mistake. The trial judge
Gallie had not taken the trouble to read the document. concluded that there had been a unilateral mistake and
ordered rectification of the contract to include ‘+ E’. VI
The principles set out in Saunders will apply to a per- Construction successfully appealed. The Court of Appeal
son who signs a blank form (United Dominions Trust held that it was not open to the trial judge to infer dis-
Ltd v Western (1975)). honesty on the part of VI Construction’s surveyor and
director and Wimpey had not discharged the onus on it
Mistake in equity of providing convincing proof that VI Construction had
actual knowledge of Wimpey’s mistake. The court noted
At common law, mistake only rarely invalidates a con- that Wimpey was one of the country’s largest construc-
tract. It may, nevertheless, be possible for the court to tion and development enterprises and therefore very
apply equitable principles to achieve a measure of justice experienced in these matters whereas VI Construction
in the case. A court may grant the following forms of had no relevant experience. Peter Gibson LJ concluded:
equitable relief. ‘I recognise that the mistake has had serious conse-
quences for Wimpey and brought a benefit to [VI Con-
1 Rescission on terms. The court may be prepared to struction] which it did not foresee in putting forward the
set aside an agreement, provided the parties accept the formula. But it is not determinative of whether Wimpey
conditions imposed by the court for a fairer solution to can successfully invoke the exceptional jurisdiction to
the problem. rectify for mutual mistake.’

Grist v Bailey (1966) 3 Specific performance. A court may refuse to grant an
order of specific performance against a party who made
Bailey agreed to sell a house to Grist for £850. The price a mistake, if it would be unfair to enforce the contract
was based on both parties’ belief that the house had against him.
a sitting tenant. The value of the house with vacant
possession would have been about £2,250. Unknown to Misrepresentation
the parties, the tenants had died and their son did not
stay on in the property. The judge held that the contract The formation of a contract is often preceded by a series
was not void at common law but he was prepared to set of negotiations between the parties. Some of the state-
the contract aside provided Bailey offered to sell the ments made may later turn out to be false. The nature of
property to Grist for the proper market price of £2,250. the statement will determine whether a remedy is avail-
able and, if it is, the type of remedy (see Fig 7.2).
2 Rectification. If a mistake is made in reducing an oral
agreement into writing, the court may rectify the docu- A false statement, which is not incorporated into the
ment so that it expresses the true intention of the parties. contract, is known as a misrepresentation. A misrep-
In the following case the Court of Appeal was asked to resentation is a false statement made by one party which
consider a trial judge’s decision to order rectification. induces the other to enter into a contract. As a general
rule, a positive statement must be made; keeping quiet

235

Part 3 Business transactions

Figure 7.2 Remedies for false statements There are certain situations where a failure to speak
will amount to an actionable misrepresentation:

■ where there is a relationship of good faith between the
parties, e.g. between partners;

■ where the contract is one of utmost good faith, e.g.
proposals for insurance cover;

■ where a half-truth is offered. In one case a solicitor
stated that he was not aware of any restrictive coven-
ants on a piece of land, which was literally true, but, if
he had bothered to read relevant documents, he would
have discovered that there were indeed restrictive
covenants (Nottingham Patent Brick and Tile Co v
Butler (1886));

■ where there has been a change in circumstances be-
tween the time of the negotiations and the conclusion
of the contract.

about something does not normally amount to misrep- With v O’Flanagan (1936)
resentation. In a recent case the seller of a house failed
to disclose that it been the scene of a gruesome murder The defendant was a doctor who wished to sell his
of a young girl, with the possibility that parts of the medical practice. In January 1934, during the course of
victim’s body might still be hidden in the house. The negotiations with the claimant, he stated (correctly) that
silence of the seller was held not to amount to a misrep- the practice was worth £2,000 a year. Unfortunately, the
resentation (Sykes v Taylor-Rose (2004)). defendant then fell ill and the practice was run by other
doctors. By the time the contract of sale to the claimant
Gestures, smiles and nods can amount to a statement. was signed in May, receipts had fallen to £5 per week.
A course of conduct can also amount to a representation. It was held that the defendant’s failure to inform the
claimant of the change of circumstances between initial
Spice Girls Ltd v Aprilia World Service negotiations and the conclusion of the contract was a
BV (2000) misrepresentation.

The claimant, SGL, was a company formed to promote The misrepresentation must involve a statement of
the Spice Girls pop group. At the beginning of May 1998, fact, opinion or intention. A statement of law may
SGL entered into a contract with the defendant, AWS, an amount to a misrepresentation.
Italian company which manufactures motorcycles and
scooters, to film a TV commercial to be shown until March Pankhania v London Borough of
1999. When the contract was signed, the Spice Girls Hackney (2002)
consisted of five members. However, a month earlier Geri
Halliwell had announced to the other members of the The claimant (P) bought a property in London at auction
group and its management that she intended to leave the from the defendants. The auction catalogue stated that
group at the end of September 1998. It had been decided the tenant of the property had a licence whereas in fact
to keep this information confidential and AWS was not the tenant held a secure tenancy. The High Court held
informed when the contract was signed. In an action by that the principle that no action could lay for a misrepres-
SGL for money allegedly due under the agreement, the entation as to law had not survived the House of Lords
High Court held that by participating in the ‘shoot’ of the decision in Kleinwort Benson Ltd v Lincoln City Council
TV commercial, SGL represented by conduct that it did (1998) (see further, p 260 ).
not know or had no reasonable grounds to believe that
any of the members of the group intended to leave. As A statement of intention will not normally amount to
the members of the group knew Ms Halliwell intended to a misrepresentation because a representation is a state-
leave during the period when the commercial was to be ment about existing facts or past events. However, if a
used, this amounted to a misrepresentation.

236

Chapter 7 Introduction to the law of contract

person misrepresents what he intends to do in the It must be shown that the statement has induced the
future, he may be liable for misrepresentation. person to whom it was made to enter into the contract.
If the person attempts to check the truth of what has
Edgington v Fitzmaurice (1885) been said, he clearly has not relied on the statement.

The directors of a company invited members of the pub- Attwood v Small (1838)
lic to lend money to the company. The directors stated
that the money would be used to improve the com- The seller of a mine made exaggerated claims about its
pany’s buildings and extend the business. The directors’ earning capacity. The buyer appointed expert agents to
real intention was to pay off the company’s existing investigate the mine. The agents reported that the seller’s
debts. It was held that the directors’ statement was a claims were true and the sale went ahead. The House of
fraudulent misrepresentation. As Bowen LJ put it: ‘There Lords held that an action by the buyer to rescind the
must be a misstatement of an existing fact: but the state contract must fail because the buyer had relied on his
of a man’s mind is as much a fact as the state of his agents’ report rather than the seller’s statements.
digestion. It is true that it is very difficult to prove what
the state of a man’s mind at a particular time is, but if it Comment. If a person is given an opportunity to test the
can be ascertained it is as much a fact as anything else. accuracy of a statement, but he does not take it, he can
A misrepresentation as to the state of a man’s mind is, still bring a claim (Redgrave v Hurd (1881)).
therefore, a misstatement of fact.’

A statement of opinion will not normally be action- Kinds of misrepresentation and
able as a misrepresentation because an opinion is a state- their effects
ment of belief which is not capable of proof.
There are three kinds of misrepresentation: fraudul-
Bissett v Wilkinson (1927) ent, negligent or innocent. In each case, the contract is
voidable.

During the course of negotiations for the sale of a farm 1 Fraudulent misrepresentation. A person will be
in New Zealand to Wilkinson, Bissett stated that the land liable for fraud if he makes a statement which he knows
would support 2,000 sheep. The farm had not previously to be false, or he has no belief in its truth or he is reck-
been used for grazing sheep and Wilkinson knew this. It less, careless whether it is true or false (Derry v Peek
was held that Bissett was merely expressing his opinion. (1889)). The injured party may rescind the contract and
There was no misrepresentation. also sue for damages for the tort of deceit. The assess-
ment of damages for a fraudulent misrepresentation was
There are occasions when a statement of opinion may discussed by the House of Lords in the following case.
amount to a representation of fact. If it can be estab-
lished that the person making the statement did not Smith New Court Securities Ltd v
hold that opinion or that he was in a position to know Scrimgeour Vickers (1996)
the facts on which his opinion was based, there may be
an actionable misrepresentation. The claimant, Smith New Court, was induced by a fraud-
ulent misrepresentation made by the defendants’
Smith v Land and House Property employee to buy shares in Ferranti at 82.25p per share.
Corporation (1884) At the time of purchase, the shares were trading at about
78p per share. Unknown to either party, the shares were
The vendors of a hotel stated that it was ‘let to a grossly overvalued because Ferranti was the victim of a
Mr Frederick Fleck (a most desirable tenant)’. In fact, fraud totally unconnected with the current case. When
Mr Fleck was in arrears of rent. It was held that the de- the fraud became known, the price of the shares
scription of Mr Fleck was not a mere expression of slumped. The question for the court was whether the
opinion. The vendors were in a position to know the facts claimant could recover the difference between the price
about their tenant. Their opinion that he was a desirable it had paid (the contract price) and the market price
tenant was not supported by facts within their knowledge. (4.25p per share) or the difference between the contract
price and the value of the shares had it known of the

237

Part 3 Business transactions

fraud (44p per share). The House of Lords held that the Howard Marine and Dredging Co Ltd v
claimant was entitled to recover for all the damage A Ogden & Sons (Excavations) Ltd (1978)
resulting from the transaction. The loss suffered by the
claimant was £10,764,005, which represented the differ- The defendants won a contract to carry out excavation
ence between the contract price and the value of the work for the Northumbrian Water Authority. The work
shares with knowledge of the fraud. involved dumping the spoil at sea, for which purpose
the defendants needed to charter seagoing barges. The
The House of Lords has confirmed that a defendant defendants approached the claimants who were the
who makes a fraudulent misrepresentation cannot raise owners of two suitable barges. During the course of
a defence of contributory negligence (Standard Chartered negotiations, the claimants’ marine manager stated that
Bank v Pakistan National Shipping Corporation (2003)). the payload of the barges was 1,600 tonnes. This was
based on the deadweight figure of 1,800 tonnes given in
2 Negligent misrepresentation. This is where the the Lloyd’s Register. However, the Register was wrong.
person making the false statement has no reasonable The shipping documents, which the marine manager had
grounds for believing the statement to be true. Damages seen, gave the true deadweight as 1,195 tonnes, and
may be awarded in tort for a negligent misstatement this gave a payload of 1,055 tonnes. The contract to
under the principle established in Hedley Byrne & charter the barges did not mention these figures.
Co Ltd v Heller and Partners Ltd (1963) (discussed in
Chapter 11 ). The defendants fell behind schedule because of the
shortfall in the capacity of the barges. They ceased to
Esso Petroleum Co Ltd v Mardon (1976) pay the charter hire and were sued by the claimants.
The defendants counterclaimed for damages under the
Mardon entered into a three-year tenancy agreement Misrepresentation Act 1967 and in negligence at com-
with Esso in respect of a newly developed petrol filling mon law. The Court of Appeal held the claimants were
station. During the negotiations an experienced dealer liable under s 2(1) of the Misrepresentation Act 1967
representative employed by Esso told Mardon that the for the misrepresentation of the barges’ capacity. The
station would have an annual throughput of 200,000 claimants were unable to prove that their marine man-
gallons by the third year. Despite Mardon’s best efforts, ager had reasonable grounds for relying on the capacity
the throughput only reached 86,000 by the third year. figures given in the Register in preference to the figures
Mardon lost a considerable sum of money and was contained in the shipping documents. The court did not
unable to pay for petrol supplied by Esso. Esso sued for reach a firm conclusion about the claimants’ liability for
money owed and possession of the petrol station. Mardon negligence at common law.
counterclaimed for rescission of the tenancy agree-
ment and damages for negligence. The Court of Appeal Comment. (i) The Court of Appeal in this case was
applied the principle established in Hedley Byrne & Co concerned only with the question of liability and not the
Ltd v Heller and Partners Ltd. When Esso’s repres- measure of damages. There had been some uncertainty
entative forecast the station’s potential as part of the as to whether the basis of damages under s 2(1) of the
precontractual negotiations, a duty of care arose. Esso Misrepresentation Act 1967 was contractual or tortious.
intended that its forecast would be relied upon by Mardon. However, in Sharneyford Supplies Ltd v Edge (1987)
Esso was in breach of the duty of care because of the the Court of Appeal held that it should be tortious. The
error made by its representative. Esso was liable in effect of this is that the representee can only recover
damages for its negligence. loss which he has incurred through reliance on the mis-
representation. However, the damages will be assessed
Comment. Although this case was decided in 1976, the in the same way as for fraud so that the misrepresentee
events to which the decision relates took place in the early can recover for all losses flowing from the misrepres-
1960s, before the introduction of the Misrepresentation entation (Royscot Trust Ltd v Rogerson (1991)). (ii) In
Act 1967. IFE Fund SA v Goldman Sachs International (2007)
the Court of Appeal considered (obiter) the relationship
Damages may now also be awarded under s 2(1) of between an action under the Misrepresentation Act
the Misrepresentation Act 1967. and in tort. Waller LJ commented that where there is
a contract between the parties, the Misrepresentation
238 Act would apply. If the Act did not provide a remedy,
there would be no room for an action for negligent
misstatement.

Chapter 7 Introduction to the law of contract

The injured party is more likely to be successful under family is subjected to violence or threats of violence, the
the Act, because it reverses the normal burden of proof. contract may be avoided on the grounds of duress.
Thus, the defendant will only escape liability if he or she
can prove that the statement was made innocently. The Barton v Armstrong (1975)
judge may also award rescission as well as damages.

3 Innocent misrepresentation. An innocent misrepres- Armstrong was the chairman and Barton the managing
entation is a false statement made by a person who had director of an Australian company. Armstrong threatened
reasonable grounds to believe that it was true, not only to have Barton killed if he did not sign an agreement to
when it was made, but also when the contract was entered buy out Armstrong’s interest in the company on very
into. The basic remedy is rescission of the contract: under favourable terms. The Privy Council held that the agree-
s 2(2) of the Misrepresentation Act 1967, the court may ment was signed under duress and could be avoided by
in its discretion award damages instead. There was some Barton.
uncertainty about whether damages could be awarded
under s 2(2) if rescission was no longer available because, Traditionally, the common law doctrine of duress was
for example, a third party had acquired rights in the limited to violence and threats of violence to the person.
subject matter of the contract (see below). In Thomas However, in recent years the courts have recognised eco-
Witter Ltd v TBP Industries Ltd (1996) the Court of nomic duress as a factor which may invalidate consent
Appeal decided that damages could be awarded under and render a contract voidable.
s 2(2), provided that the right to rescind had existed at
some time, but it was not necessary for the right to North Ocean Shipping Co Ltd v Hyundai
rescind to exist at the time the court gave judgment. Construction Co Ltd (1978)

Rescission The defendant shipbuilders agreed to build a tanker for
the claimant shipowners. The price was payable in US
Rescission aims to restore the parties to their pre- dollars in five instalments. After the first instalment had
contractual positions. Money or goods which have been paid, there was a sharp fall in the value of the US
changed hands must be returned. Like all equitable dollar and the defendants threatened to break the con-
remedies, it is not available as of right. In particular, the tract unless the claimants paid an extra 10 per cent on
court may refuse to award rescission in the following each of the remaining instalments. The claimants had
circumstances: already entered into a lucrative contract to charter the
tanker on its completion and, anxious to take delivery, they
■ where the injured party has received some benefit reluctantly paid the increased instalments. Eight months
under the contract or has in some way affirmed it: a later they brought an action to recover the excess over
long delay in taking legal action is taken as evidence the original contract price. It was held that the contract
of affirmation (Leaf v International Galleries (1950): was voidable on the grounds of economic duress, but
see above, p 232 ); that the claimants could not recover the excess because
they had affirmed the contract by failing to protest before
■ where the parties cannot be restored to their original they did.
positions because, for example, goods have been de-
stroyed or they have been sold to a third party (Lewis Atlas Express Ltd v Kafco (Importers
v Averay (1971): see above, p 234 ). and Distributors) Ltd (1989)

Duress and undue influence Atlas, a road carrier, entered into a contract with Kafco,
a small company importing and distributing basketware,
The general rule of law is that a contract will be valid to deliver cartons of basketware which Kafco had sold
only if the parties entered into it freely and voluntarily. to Woolworths. Atlas’s manager had quoted a price of
At common law, where a party to a contract or his or her £1.10 per carton based on an assumption that each load
would contain between 400 and 600 cartons. However,
the first load contained only 200 cartons. Atlas’s man-
ager refused to carry any more cartons unless Kafco

239

Part 3 Business transactions

agreed to pay a minimum of £440 per load. Kafco was respect of the house loan. Mrs Morgan appealed against
anxious about maintaining a good relationship with a possession order obtained by the bank, on the ground
Woolworths but was unable easily to find another carrier. that the mortgage transaction should be set aside because
Accordingly, Kafco agreed to the new terms but later of undue influence on the part of the bank. The House of
refused to pay. The High Court held that Kafco was not Lords held that Mrs Morgan’s action should fail. Although
liable as Kafco’s agreement to the new terms had been Mrs Morgan had not had the benefit of independent
obtained by economic duress. advice, the bank manager had not taken advantage of
her and the transaction was not to her disadvantage.
Equity recognises a more subtle form of pressure:
undue influence. The relationship between the parties The legal considerations involved in giving guarantees
may be such that one occupies a position of dominance to secure business loans, including the effect of the deci-
and influence over the other. There are several relation- sion of the House of Lords in the Royal Bank of Scotland
ships, such as doctor and patient, solicitor and client, v Etridge (No 2) (2001) case, are discussed in detail in
parent and child, where it is automatically assumed that Chapter 4 .
undue influence has been at work. The contract will be
set aside unless the dominant person can show that the Legality
complainant had independent advice. Where there is no
special relationship between the parties, the claimant The principle of freedom of contract is subject to a basic
must prove that pressure was applied. rule that the courts will not uphold an agreement which
is illegal or contrary to public policy. Where the contract
A number of cases have raised the question whether involves some kind of moral wrongdoing, it will be ille-
a presumption of undue influence is created by the gal. If, however, the conduct is neither immoral nor
relationship between a banker and his customer. blameworthy, but simply undesirable, the contract will
be void. A court may object to an agreement either
Lloyds Bank Ltd v Bundy (1974) because of a rule of common law or because it is con-
trary to statute.
An elderly farmer, inexperienced in business matters,
mortgaged his home and only asset to the bank to guar- Contracts illegal at common law
antee his son’s business overdraft. The Court of Appeal
set aside the guarantee and charge. The farmer had The following agreements come into this category:
placed himself in the hands of the bank and had looked
to the assistant bank manager for advice. It was clearly 1 Contracts to commit crimes or civil wrongs, e.g.
in the bank’s interest that the farmer provided the a contract to assassinate someone or to defraud HM
guarantee. The court held that the presumption of undue Revenue & Customs.
influence applied. The bank had failed to rebut the pre-
sumption since the farmer had not been advised to seek
independent advice.

The Bundy case is exceptional and normally the 2 Contracts involving sexual immorality, e.g. an

presumption does not apply to the banker/customer agreement to pay an allowance to a mistress or any con-

relationship. tract with an immoral purpose.

National Westminster Bank plc v Pearce v Brooks (1866)
Morgan (1985)
Pearce let a coach out on hire to a prostitute (Brooks)
Mrs Morgan agreed to the family home being mortgaged knowing that it would be used by her to ply her trade.
to secure an advance to her husband by the bank. She The coach was returned in a damaged state. Pearce was
signed the legal charge after receiving assurances from unable to recover the hire charges or for the damage, as
the bank manager that the mortgage only covered the the court refused to help him to enforce a contract for an
house loan and not her husband’s business liability. immoral purpose.
Mr Morgan died. His only liability to the bank was in

240

Chapter 7 Introduction to the law of contract

3 Contracts tending to promote corruption in public A contract which provides for a possible future
life, e.g. a contract to bribe an official or to procure a title. separation of husband and wife will be void, but, if the
marriage is breaking up, they may make a contract to
4 Contracts of trading with an enemy in wartime. provide for their immediate separation. Contracts to
introduce men and women with a view to their subse-
5 Contracts directed against the welfare of a friendly quent marriage are void. These are known as marriage-
foreign state, e.g. a partnership intending to import brokage contracts.
whisky into America during Prohibition (Foster v
Driscoll (1929)). 3 Contracts in restraint of trade. These are contracts
which restrict the future liberty of a person to carry on his
6 Contracts prejudicial to the administration of business, trade or profession in any way he chooses. A
justice, e.g. a contract not to prosecute a person for an contract in restraint of trade is contrary to public policy
offence concerning the public. and void unless it is shown to be reasonable as between the
parties and from the point of view of the community. A
Consequences of illegality restraint will be reasonable if it is designed to protect
legitimate interests, such as trade secrets or business con-
A contract which is illegal from the start will be void and nections. A restraint which is excessive as regards its area,
unenforceable. Money or property transferred under the time of operation or the trades it forbids will be void.
contract is not usually recoverable. This general rule is
subject to three exceptions: There are four main types of restraint which we will
consider.
1 a party can recover money or property if he can estab-
lish his case without relying on the illegal contract, (a) A term in a contract of employment which restricts
e.g. by suing in tort; an employee’s freedom of conduct either during the
period of employment or after the employment has
2 if the parties are not equally at fault, the less guilty terminated. Such a restraint will only be reasonable if it
party may be allowed to recover; protects the employer’s interests and is not excessive.
The only matters in which an employer has a legitim-
3 a party may recover if he repents before the contract ate interest is the protection of trade secrets and his
has been substantially performed. customer connections. The following case involves an
employer seeking to protect his trade secrets.
Some contracts are quite innocent at the outset, but
become illegal because of the intention of one of the Forster & Sons Ltd v Suggett (1918)
parties, e.g. a landlord lets out a flat, unaware of the
tenant’s intention to install his mistress in it. In this The claimants were manufacturers of glass and glass
situation, one of the parties is innocent. The guilty party bottles. They had trained their works manager in the use
cannot sue on the contract or succeed in any way against of certain secret processes, including the correct mixture
the innocent party. The innocent party will protect his of gas and air in the furnaces. The works manager had
rights if he repudiates the contract as soon as he is aware agreed that for a period of five years after his employ-
of the illegality. ment with the claimants ended he would not carry on in
the UK, or be interested in, glass bottle manufacture or
Contracts void at common law any other business connected with glass-making as car-
ried on by the claimants. It was held that the restraint was
There are three types of contract in this category: enforceable. Secret processes are a legitimate object of
protection and in this case the restraint was reasonable.
1 Contracts to oust the jurisdiction of the courts. A
clause which seeks to prevent the courts trying an issue
is void. This rule does not affect ‘binding in honour only’
clauses, by which the parties agree not to create a contract.

2 Contracts prejudicial to the status of marriage. This A distinction must be drawn between protecting trade
includes a contract to restrain a person from marrying secrets, which is a protectable interest, and preventing
at all or except for one person. Contracts not to marry a an employee from making use of knowledge and skills
person of a particular religious faith or nationality may which he has acquired in the course of his employment,
be upheld if they are reasonable. which is not protectable.

241

Part 3 Business transactions

Herbert Morris Ltd v Saxelby (1916) customers away from him. A restraint of this kind will
only be valid if the nature of the employment is such
A seven-year restraint on an engineer employed by a lead- that the employee has personal contact with customers
ing UK manufacturer of hoisting machinery was declared and some influence over them. Restraints have been
void. Although the engineer had access to confiden- upheld in the case of a solicitor’s clerk (Fitch v Dewes
tial information, such as drawings, charts and company (1921)), a milk roundsman (Home Counties Dairies
systems, all that he could take away with him was a very v Skilton (1970)) and an estate agent’s clerk (Scorer v
general knowledge of the company’s methods and sys- Seymour Jones (1966)). However, an agreement by a
tems. The House of Lords did not regard such knowledge manager of a bookmakers not to engage in a similar
as a trade secret. business to his employer within a 12-mile radius on the
termination of his employment was not upheld as the
In the Forster case, the employee was bound by an manager did not have face-to-face contact with his
express term in his contract. An express term was not customers (S W Strange Ltd v Mann (1965)).
really needed as there is an implied duty on the part of
employees not to reveal their employers’ trade secrets or Once it is established that the restraint only protects
other highly confidential information. The implied duty a legitimate interest, the next step is to show that it is
will not cover all commercially sensitive information. reasonable in the circumstances. The restraint must not
be excessive as regards its area and time of operation.
Faccenda Chicken Ltd v Fowler (1986) The two factors are complementary: the wider the area
of the restraint, the shorter the duration which might
The defendant, Fowler, had been employed as the be regarded as reasonable, and vice versa. There are no
claimant company’s sales manager until he resigned to precise limits; each case is decided on its merits. In Fitch
set up a rival business selling chickens from refrigerated v Dewes (1921) an agreement by a solicitor’s clerk never
vans. Several of Faccenda’s employees joined Fowler to practise within seven miles of Tamworth Town
in his new business. Their contracts of employment with Hall was held to be reasonable, whereas in Commercial
Faccenda did not include an express term restricting Plastics Ltd v Vincent (1964) one of the grounds for
their activities if they left their jobs with Faccenda. finding a one-year restraint to be unreasonable in the
Faccenda argued that Fowler and his colleagues had context of the plastics industry was that it was unlimited
broken an implied term of the contract by making use of in its area of operation.
confidential sales information. The Court of Appeal con-
firmed the existence of an implied duty of confidentiality If a restraint is upheld by the courts, it can be
but held that the information which Faccenda was trying enforced by an injunction (see later).
to protect was not confidential.
(b) A ‘solus’ agreement by which a trader agrees to restrict
An alternative form of protection for an employer is his orders from one supplier. Although such an agree-
to insert a so-called ‘garden leave’ clause in an employee’s ment is subject to the doctrine of restraint of trade, it
contract of employment (Evening Standard Co Ltd v may be enforceable if it is reasonable and not contrary to
Henderson (1987)). Such a clause typically requires the the public interest. A number of cases have arisen from
employee to give a long period of notice, e.g. one year. the operation of ‘solus’ agreements in the petrol industry.
During the notice period, the employee can be barred
from the workplace to stop him from acquiring any Esso Petroleum Ltd v Harper’s Garage
further information, and he can also be prevented from (Stourport) Ltd (1967)
working for a new employer until his notice period
expires. Although the employee will continue to be paid, Harper’s owned two garages. It entered into a ‘solus’
he or she is left with nothing to do but look after their agreement with Esso by which it agreed to buy all its
garden. motor fuel from Esso, to keep the garages open all rea-
sonable hours and not to sell the garages without ensur-
An employer is also entitled to protect his customer ing that the purchaser entered into a similar agreement
connections by preventing employees from enticing his with Esso. In return, Esso allowed a rebate on all fuels
bought. The agreement was to last for four-and-a-half
years in respect of one garage and 21 years for the other.
The latter garage was mortgaged to Esso for a loan of

242

Chapter 7 Introduction to the law of contract

£7,000 repayable over 21 years and not earlier. The parts of the contract. The lawful main part can then be
House of Lords held that the agreements were in restraint enforced by the court. Any money paid or property
of trade and, therefore, void, unless they could be justi- transferred is recoverable.
fied as reasonable. The agreement which lasted for four-
and-a-half years was reasonable, but the other, which Contracts illegal by statute
lasted 21 years, was not.
Some statutes expressly prohibit a certain type of con-
Although the length of the restraint was the deciding tract. For example, under Chapter 1 of the Competition
factor in the Harper’s case, a long restraint may be rea- Act 1998 agreements by two or more persons to fix the
sonable in certain situations. price at which goods may be resold are unlawful. The
provision outlaws the practice of ‘blacklisting’ retailers
Alec Lobb (Garages) Ltd v Total Oil (GB) who sell goods below a minimum resale price fixed by
Ltd (1985) suppliers. Not all statutes are quite so specific. Some
contracts may incidentally infringe the provisions of
The Court of Appeal upheld a 21-year restraint tied to an Act of Parliament because, for example, one of the
a loan agreement as reasonable in the circumstances. parties is trading without a licence, or statutory require-
The loan was part of a rescue package which greatly ments have not been observed. It seems that the contract
benefited the garage. There were also opportunities for will be illegal if it was Parliament’s intention in the
the garage to break the arrangement after seven and passing of the Act to preserve public order or protect
14 years. Taking these facts into account, the restraint the public.
was not unreasonable.

(c) A contract for the sale of a business by which the Cope v Rowlands (1836)
seller agrees not to compete with the buyer. This kind of
restraint is more likely to be upheld by the courts than a A court refused to enforce a contract on behalf of an
restraint on an employee because there is a greater like- unlicensed broker because the purpose of the licensing
lihood of the parties bargaining as equals. Nevertheless, requirements was to protect the public.
the parties must be careful to ensure that the restraint is
no wider than is necessary to provide protection for the The contract will be valid if it appears that the statutory
purchaser. provision was imposed for an administrative purpose.

British Reinforced Concrete Engineering Smith v Mawhood (1894)
Co Ltd v Schelff (1921)

The claimants carried on a large business manufacturing A tobacconist was able to sue on a contract for the sale
and selling ‘BRC’ road reinforcements. The defendant of tobacco even though he did not have a licence as
had a small business selling ‘Loop’ road reinforcements. required by statute. The sole aim of the statute was to
The defendant sold his business to the claimants and raise revenue, not to prohibit contracts made by unlic-
agreed not to compete with them in the manufacture or ensed tobacconists.
sale of road reinforcements. It was held that the restraint
was void as it covered a wider area of business than the Consequences
defendant had transferred to the claimants. The effects of the illegality on the contract are the same
as for contracts which are illegal at common law.
(d) Contracts between traders and businessmen to
regulate prices or output. This branch of the law is now Contracts void by statute
largely covered by legislation and will be considered later.
1 Gambling contracts. It used to be the case that
Consequences gaming and wagering contracts were rendered null and
A clause which is in restraint of trade is void and unen- void by legislation (the Gaming Act 1845). However, the
forceable. It may be possible, however, to sever the void

243

Part 3 Business transactions

Gambling Act 2005 repeals all statutory provisions pre- to the establishment of an investigatory system but tough
venting enforcement and provides that gambling con- powers to ban anti-competitive practices soon followed.
tracts are as enforceable as other contracts. The Gambling Competition law in the UK developed in a piecemeal
Commission has the power to void a bet in specified fashion after 1948 in response to changing needs and
circumstances, e.g. where one of the parties believes that circumstances.
the offence of cheating is likely to be committed in rela-
tion to the bet, and the Commission believes that the bet By 1997 the law had become a complex mixture of UK
was substantially unfair. If the bet is declared void any and EC provisions with responsibility for the enforce-
money paid must be returned. ment spread between a number of different agencies.
In 1997 the government announced its intention of
2 Anti-competitive agreements. Statutory control of reforming UK competition law. The CA 1998 came into
anti-competitive agreements in the UK is set out in the force on 1 March 2000.
Competition Act 1998 (CA 1998) and the Enterprise Act
2002 (EA 2002). The CA 1998 introduced a new regime The EA 2002 introduces a wide range of measures
for dealing with anti-competitive practices based on designed to enhance the UK’s enterprise capability. They
European Community competition law contained in include modernising the insolvency laws, creating the
Arts 81 and 82 of the EC Treaty. The EA 2002 builds on Office of Fair Trading as a statutory authority, and
the changes made by the CA 1998 and introduces a strengthening consumer protection. The provisions
number of new measures to strengthen the UK’s com- which deal with the reform of competition law are de-
petition law framework. signed to complement the changes introduced by the
CA 1998 and largely replace the Fair Trading Act 1973.
Competition policy The competition law provisions of the EA 2002 came
into effect in June 2003.

An outline of the new legal framework is set out
below.

Competition is an essential requirement of a free-market European Community competition law
economy. It encourages efficiency among producers and
suppliers by providing consumers with a choice of goods Under Arts 81 and 82 of the Treaty of Rome all agree-
and services at the best possible price. Paradoxically, ments between businesses which operate to prevent or
however, unregulated competition in a free market leads restrict competition in the EC are void. Article 81 bans
inevitably to monopoly and other undesirable practices. practices which distort competition between members
A company which is aggressively competitive will seek to of the EC. These include price fixing, restrictions in
win as large a share of the market as is possible and in production and market sharing. The European Com-
so doing reduce the competition it faces. If the company mission may grant exemptions in relation to individual
is too successful, it may in time completely eliminate any agreements and block exemptions for certain categories
competition. Another problem which may arise is that of agreement.
companies may find it more profitable to co-operate
with each other than to compete. Companies within a Crehan v Inntrepreneur Pub Company
particular industry may form a cartel to fix minimum and Brewman Group Ltd (2003)
prices for their products or restrict production, denying
consumers the benefits of a competitive market. Thus, it The claimant C was the tenant of two tied public houses
is necessary to regulate the competitive process in order of which IPC, a property company, was the lessor and B
to maintain a healthy free market which serves the inter- was the nominated supplier of beer. C’s pubs were not
ests of consumers. Statutory regulation of competition successful and he surrendered the leases. C was sued
in the UK is relatively recent. Before the enactment of by B for unpaid deliveries of beer and C counterclaimed
the Monopolies and Trade Practices Act 1948, the only for damages arguing that his business had failed be-
control over anti-competitive practices was the common cause of competition from untied pubs that could buy
law doctrine of restraint of trade, but this was of limited beer at a discount and retail it for less than C could as
application. Statutory intervention was confined initially a tied tenant. C claimed that the beer-tie agreement
infringed Art 81. IPC contended that the beer ties did not
breach Art 81 and, even if they did, they were protected

244

Chapter 7 Introduction to the law of contract

by a block exemption. The case was referred to the Publishers’ Association applied to the European Court
European Court of Justice (ECJ) which ruled that parties for an annulment of the Commission’s decision. The
to an agreement that breaches Art 81 may bring a claim European Court upheld the Commission’s view that the
in domestic courts for breach of Art 81. The High Court Agreement infringed Art 81.
held that, in order to establish a claim under Art 81, two
conditions must be satisfied: first, having regard to the Comment. The European Court’s judgment did not affect
legal and economic context of the leases, it was difficult the operation of the Net Book Agreement within the UK:
for businesses to enter the market or increase their the Commission’s challenge was confined to how it
market share; and, second, if there was a network of operated in other EC states. However, the Net Book
similar leases, this had contributed to sealing off the Agreement only lasted for a few years after this judg-
market. The court found that the first condition had not ment. The agreement collapsed in practice in 1995, and
been breached. The enactment of the Supply of Beer in March 1997 the Restrictive Practices Court discharged
(Tied Estates) Order 1989 (SI 1989/2390) had led to the the orders which upheld the agreement.
break-up of the breweries’ tied estates and a significant
number of previously tied pubs had been sold. It was not The European Commission also has the power to
difficult for newcomers to enter the market or for exist- control mergers with a Community dimension under an
ing participants to increase their market share. The beer EC Merger Control Regulation which came into force in
ties did not infringe Art 81 and C’s claim therefore failed 1990. A merger will come within the terms of the EC
even though the court concluded that the failure of the Regulation if both:
business was caused by the beer ties. The court also
decided that the block exemption was not available. (a) the aggregate worldwide turnover exceeds 5 billion
euros; and
Comment. The trial judge’s decision was overturned in
the Court of Appeal on the grounds that he had not com- (b) at least two of the parties have a community turn-
plied with the duty of ‘sincere co-operation’ required by over in excess of 250 million euros unless each of
Art 10 of the EC Treaty in that he had not accepted the the undertakings makes more than two-thirds of
Commission’s view about the state of the UK beer mar- its turnover in the same member state.
ket as expressed in a different case involving Whitbread.
The House of Lords held that the trial judge’s decision Mergers falling within the threshold must be notified
should be reinstated. The Commission’s findings might to the Commission within a week of the conclusion of
constitute a highly persuasive part of the evidence which the agreement to acquire control. The Commission must
he should consider but he was entitled to consider addi- decide within a month of notification whether to launch
tional evidence and form his own view. a full investigation, which must be completed within a
further four months. If the Commission concludes that
Article 82 prohibits the abuse of a monopolistic posi- the merger will significantly impede effective competi-
tion by an organisation within the EC. Practices which tion in the whole or part of the EC, it must be blocked.
might be considered abuses include imposing unfair
buying or selling prices. Responsibility for enforcing UK competition law
these provisions rests with the European Commission.
Competition Act 1998
Publishers’ Association v Commission
of the European Communities (1992) The CA 1998 introduced two prohibitions which are
largely based on the prohibitions operating at European
This European Court of Justice case involved the opera- level under Arts 81 and 82.
tion of the Net Book Agreement under which publishers
enforced resale price maintenance in respect of books. Chapter I prohibition
The agreement had been approved by the Restrictive The first prohibition, the Chapter I prohibition, is based
Practices Court under UK legislation (Re Net Book Agree- on Art 81. It prohibits agreements which have the object
ment (1962)). However, in 1988 the European Commission or effect of preventing, restricting or distorting competi-
found that the Agreement infringed Art 81 in respect of tion in the UK. The anti-competitive nature of the agree-
books sold from the UK to other EC states. The Com- ment will be judged according to its effects or intended
mission turned down an application for exemption. The effects on competition. The Act sets out illustrative ex-
amples of agreements to which the prohibition applies:

245

Part 3 Business transactions

■ agreeing to fix purchase or selling prices or other where this affects trade within the UK. The Act contains
trading conditions; an illustrative list of the kinds of conduct which may be
deemed an abuse:
■ agreeing to limit or control production, markets, tech-
nical development or investment; ■ imposing unfair purchase or selling prices;
■ limiting production, markets or technical develop-
■ agreeing to share markets or supply sources;
■ agreeing to apply different trading conditions to equi- ments to the prejudice of consumers;
■ applying different trading conditions to equivalent
valent transactions, thereby placing some parties at
a competitive disadvantage; transactions, thereby placing certain parties at a com-
■ agreeing to make contracts subject to unrelated petitive disadvantage;
conditions. ■ attaching unrelated supplementary conditions to
contracts.
The agreement must have an ‘appreciable effect’ on
competition. An agreement is unlikely to be considered There are two tests for determining whether the
as having an appreciable effect where the combined Chapter II prohibition applies:
market share of the parties does not exceed 25 per cent.
However, agreements to fix prices, impose minimum ■ whether an undertaking is dominant; and
resale prices or share markets will be seen as capable of ■ if it is dominant, whether it is abusing its dominant
having an appreciable effect even where the market
share falls below 25 per cent. position.

Certain types of agreement are excluded from the An undertaking will be regarded as dominant if it can
Chapter I prohibition, such as where there are overrid- behave ‘to an appreciable extent independently of its
ing considerations of national policy. Some agreements competitors and customers and ultimately of con-
are exempt from the prohibition. There are three types sumers’ when making decisions. The Act does not set
of exemption: any market share thresholds for a presumption of dom-
inance but guidance from EC case law is relevant. The
1 Individual exemption. The parties to an individual European Court of Justice has stated that dominance
agreement may apply to the Office of Fair Trading can be presumed if an undertaking has a market share
(OFT) for exemption for their agreement, if it can be persistently above 50 per cent. The OFT takes the view
shown that the agreement contributes to improving that an undertaking is unlikely to be considered dom-
production or distribution, or to promoting technical or inant if its market share is less than 40 per cent.
economic progress and allows consumers a fair share of Nevertheless, an undertaking with a lower market share
the resulting benefit. Any restrictions in the agreement may be considered dominant if, for example, the struc-
must be indispensable to achieving these aims and the ture of the market enables it to act independently of its
agreement must not eliminate competition. competitors. The OFT will consider the number and size
of existing competitors as well as the potential for new
2 Block exemptions. These exemptions apply auto- competitors to enter the market.
matically to certain types of agreement which meet the
same exemption criteria as for individual exemption. The Chapter II prohibition is subject to similar exclu-
sions to the Chapter I prohibition. There are, however,
3 Parallel exemptions. These exemptions automatically no exemptions from Chapter II.
apply where an agreement is covered by an EC individual
or block exemption under Art 81(3) of the EC Treaty, Enforcement
or would be covered by an EC block exemption if the Responsibility for enforcing the new legislation rests
agreement had an effect on trade between member states primarily with the OFT. It has the power to grant ex-
of the EU. In certain circumstances, the OFT may im- emptions, investigate suspected breaches, make decisions
pose conditions on the exemption or vary or cancel the enforceable by a court order and publish advice and
exemption. information. The utility regulators enjoy equivalent
powers within their own areas of responsibility.
Chapter II prohibition
The second prohibition, the Chapter II prohibition, is If the OFT has reasonable grounds for suspecting an
based on Art 82. It prohibits the abuse by an undertak- infringement of the Act, it may exercise the following
ing of a dominant position in the UK or part of the UK, powers:

246

Chapter 7 Introduction to the law of contract

■ order the production of any relevant documents or 2 It investigates specific markets or the conduct of
information (it may take copies of any documents companies or mergers, decides what is in the public
produced and require an explanation of the contents); interest and reports to the Secretary of State with any
recommendations for action. It has no power to
■ enter premises without a warrant in order to obtain initiate its own inquiries. Examples of investigations
documents, take copies of them, obtain an explana- include the supply of groceries by supermarkets, the
tion of the documents or obtain information held on supply of new cars and the supply of airport services
a computer to be produced in a readable form (two by BAA in the UK.
working days’ notice must be given to the occupier of
the premises unless, for example, the undertaking is The Enterprise Act 2002
already under investigation);
The EA 2002 made a number of significant changes to
■ enter premises without notice on the authority of a UK competition law.
High Court warrant, to search for documentary
evidence. 1 Office of Fair Trading (OFT). The EA 2002 abolished
the statutory position of the Director General of Fair
Failure to co-operate with an investigation may Trading and transferred his functions to the OFT, which
amount to a criminal offence, punishable by a fine or became a corporate body with effect from 1 April 2003.
imprisonment. The OFT consists of a Chairman, Chief Executive and
four other board members. One of the ways in which the
If the OFT concludes that infringement of either pro- OFT carries out its functions is by undertaking studies
hibition has occurred, it may give a direction to either of markets which are not operating well for consumers.
party to bring the infringement to an end. This may These market studies are carried out by the Markets and
include directions to modify or terminate the agreement Policy Initiatives Division (MPI) and can result in a
or modify or cease the offending conduct. If a party fails range of outcomes including OFT enforcement action,
to comply with a direction, the OFT can seek a court a market investigation reference to the CC, proposals
order to secure compliance. Any breach of a court order for changes in the law or publishing better information
will be dealt with as a contempt of court. for consumers.

Consequences of breach 2 Competition Appeal Tribunal. Part 2 of the EA
The OFT has the power to impose civil fines of up to 2002 established an independent Competition Appeal
10 per cent of an undertaking’s turnover for infringe- Tribunal to replace the Competition Commission
ment of either Chapter I or Chapter II prohibitions. Appeal Tribunal.
Small businesses enjoy limited immunity from financial
penalties in respect of small agreements (Chapter I pro- 3 Mergers. Part 3 of the EA 2002 reformed the UK’s
hibition) and conduct of minor significance (Chapter II merger control framework by replacing most of the
prohibition). merger control provisions of the Fair Trading Act 1973.
The main provisions are:
An agreement which infringes the Chapter I prohibi-
tion is void and unenforceable. Third parties who believe ■ Decisions on mergers have been de-politicised; they
that they have suffered loss as a result of an unlawful are now taken by the OFT and CC as independent
agreement or conduct may have a claim for damages in competition authorities rather than by the Secretary
the courts under the terms of s 60, which requires the of State for Business, Enterprise & Regulatory Reform
UK authorities to deal with cases in a way which is con- (formerly Trade and Industry).
sistent with EC law.
■ Mergers are considered against a new ‘competition
Competition Commission test’ rather than the wider ‘public interest test’ pre-
The CA 1998 established the Competition Commission viously applied. Mergers will be prohibited if they
(CC), which replaced the Monopolies and Mergers Com- would result in a substantial lessening of competition
mission. The CC is an independent administrative tri- in a UK market. The competition authorities have
bunal whose chairman and members are appointed by discretion to allow a merger even if there is a sub-
the Secretary of State. The CC carries out two functions: stantial lessening of competition where they expect
defined types of consumer benefit to result.
1 It hears appeals against decisions made by the OFT in
enforcing the prohibitions.

247

Part 3 Business transactions

■ The OFT may investigate mergers which meet either because, if it were accepted, there would be a relevant
a ‘turnover test’ or a ‘share of supply’ test. The ‘turn- merger situation within the terms of the EA 2002, which
over test’, which replaces the previous assets test, will had come into force on 20 June 2003. IBA, an Australian
be met if the target company has a UK turnover of at company in the same market, complained to the OFT in
least £70 million. The ‘share of supply test’ will be met August about the proposed merger. The OFT investigated
if the merged companies will together supply at least the proposed merger and in November 2003 decided not
25 per cent of the goods or services of a market, either to refer the merger to the CC because, although the
in the UK as a whole or in a substantial part of it. If merged company would have a significant market power,
the merger meets the EC merger test, the OFT will not it did not believe that the proposed merger would result in
investigate and cannot refer the merger. substantial lessening of competition in the UK. In reach-
ing this view, the OFT had been influenced by forthcoming
■ The OFT can investigate changes in levels of control changes to the process of procuring IT systems in the
of companies. The provisions envisage three different NHS. IBA was unhappy with the outcome and applied to
levels of control: material influence over policy, con- the Competition Appeal Tribunal (CAT) for a review of the
trol of policy (known as de facto control) and having decision. The CAT quashed the OFT’s decision. The OFT,
a controlling interest (known as de jure control), iSoft and Torex appealed against that decision. The
which normally involves acquiring 50 per cent of Court of Appeal held that the test to be applied was that
voting rights. stated in s 33(1) of the EA 2002. The OFT had a duty to
make a reference if it had a reasonable and objectively
■ The OFT must refer a merger to the CC if it believes justified belief that the proposed merger may be ex-
that the merger may substantially lessen competition. pected to result in substantial lessening of competition.
Alternatively, the OFT may seek undertakings from The Court of Appeal held that, although the CAT had not
the merging companies to remedy the adverse effects applied the proper test, its decision to quash the OFT’s
of the merger. The duty to refer does not apply in decision not to refer was correct. The court was not sat-
three situations: isfied that the OFT had taken all material matters into
(a) where the merger is insufficiently advanced; account in reaching its decision.
(b) if the market is of insufficient importance; or
(c) the benefits to consumers outweigh the adverse 4 Market investigation references. Part 4 of the EA
effect on competition. 2002 established a new system of market investigations
by the CC, which replaced the system of monopoly
■ If the merger is referred to the CC, it will conduct a enquiries under the Fair Trading Act 1973. The OFT
full investigation. If the CC concludes that the merger (and specified regulators such as the rail regulator) may
has caused or will cause a substantial lessening of make market investigation references to the CC where it
competition, the CC can stop the merger or impose appears that the structure of the market or the conduct
remedies, such as undertakings from the parties or of businesses is harming competition. The CC will carry
orders. The OFT will monitor compliance with any out a detailed investigation to establish whether any
undertakings or orders. aspects of the referred market prevents, restricts or dis-
torts competition in relation to the supply or acquisition
■ Mergers involving defence companies, newspapers of goods or services in the UK as a whole or part of it.
and water companies will be treated as special cases If the CC identifies an adverse effect, it must decide on
and may be subject to different procedures. action to remedy the effect, which may include seek-
ing undertakings or making orders. The Secretary of
■ The Secretary of State will continue to decide mer- State has the power to intervene in cases involving pub-
gers which raise public interest considerations, e.g. lic interest considerations (currently only matters of
national security concerns. national security). Parties affected may seek a review of
the lawfulness and fairness of any decision by the OFT,
Office of Fair Trading v IBA Health the CC or the Secretary of State by the Competition
Ltd (2004) Appeal Tribunal, which can ask for a reconsideration of
the decision.
In July 2003 iSoft Group plc offered to acquire the share
capital of Torex Ltd. Both companies were engaged in
the supply of software and systems to the healthcare
applications market. The OFT was notified of the offer

248

Chapter 7 Introduction to the law of contract

5 Criminalisation of cartels. Part 6 of the EA 2002 or consumer regulation powers, launching a market
introduced a new offence for individuals who dishon- study, market investigation reference to the CC for fur-
estly engage in cartel agreements. The cartel offence ther investigation or recommendations for changes in
operates alongside the provision of the CA 1998 which legislation. Super-complaints will be considered in more
provides civil sanctions for undertakings that engage in detail in Chapter 14 .
anti-competitive agreements. A person will be guilty of
an offence if he dishonestly agrees with another that 7 Disqualification of directors. The EA 2002 amended
undertakings will engage in one or more of the follow- the Company Directors Disqualification Act 1986 to
ing cartel activities: allow the OFT (and specified regulators) to apply to the
High Court for an order to disqualify directors of com-
■ price fixing; panies which have committed breaches of the following
■ limitation of supply or production; competition law provisions:
■ market-sharing;
■ bid-rigging. ■ Chapter I prohibition of the CA 1998;
■ Art 81 of the EC Treaty;
The offence can only be committed in respect of ■ Chapter II prohibition of the CA 1998;
horizontal agreements, i.e. between undertakings at ■ Art 82 of the EC Treaty.
the same level of the supply chain. It does not apply to
vertical agreements. The offence will be committed The maximum period of disqualification is 15 years.
irrespective of whether an agreement is reached or
implemented. The offence is triable either in the magis- 8 Changes to the CA 1998. The following changes took
trates’ court or by the Crown Court. If convicted by effect from 1 April 2003:
magistrates, the offender may be sentenced to a max-
imum of six months’ imprisonment or a fine up to the ■ The exclusion of designated professional rules from
statutory maximum. If convicted by the Crown Court, the Chapter 1 prohibition of anti-competitive pro-
an offender may be sentenced to a maximum of five visions is repealed.
years’ imprisonment or an unlimited fine. Prosecutions
will normally be brought by the Serious Fraud Office, ■ Where the OFT obtains a warrant to enter premises
although the OFT may also undertake prosecutions. If to undertake a CA 1998 investigation, the warrant
an individual provides information to investigatory may authorise certain individuals, e.g. IT experts, to
authorities and co-operates with any investigation, the accompany the OFT official. (A similar provision is
OFT may issue a ‘no-action letter’ confirming that an enacted in relation to the power to enter premises to
individual will not be prosecuted. The EA 2002 gives the investigate the new cartel offence introduced by the
OFT a range of powers to investigate cartel offences EA 2002.)
including the power to compel individuals to answer
questions or provide documents, to enter premises and Discharge of contracts
carry out surveillance.

6 Super-complaints. The EA 2002 introduced a new The contract may come to an end and the parties dis-
procedure to allow certain designated consumer bodies charged from their contractual obligations in four ways:
to make super-complaints to the OFT and other by performance, agreement, frustration and breach.
specified regulators where ‘any feature or combination
of features of a market in the UK for goods or services is Performance
or appears to be significantly harming the interests of
consumers’. The OFT and other regulators have up to The general rule is that the parties must carry out pre-
90 days to respond to a super-complaint. The response cisely what they agreed under their contract. If one of
must state whether action is to be taken and, if so, what the parties does something less than or different from
is proposed. Any of the powers of the OFT or regulators that which he agreed to do, he is not discharged from the
may be used. In the case of the OFT, actions could contract and, moreover, cannot sue on the contract.
include an enforcement action under either competition

249

Part 3 Business transactions

Cutter v Powell (1795) about faulty workmanship and refused to pay the bal-
ance of £350. The Court of Appeal held that the contract
Cutter agreed to serve on a ship sailing from Jamaica had been substantially performed. The claimant was en-
to Liverpool. He was to be paid 30 guineas on arrival at titled to the outstanding £350, less the cost of remedy-
Liverpool. The ship sailed on 2 August, arriving in Liverpool ing the defects, which was estimated at £55 18s 2d.
on 9 October, but Cutter died at sea on 20 September.
It was held that his widow could not recover anything for 2 Acceptance of partial performance. If one of the
the work he had done before he died. Cutter was obliged parties only partially carries out his side of the contract,
to complete the voyage before he was entitled to payment. but the other party, exercising a genuine choice, accepts
the benefit of the partial performance, the court will
Comment. This old case is often presented as a classic infer a promise to pay for the benefit received.
illustration of the law’s insistence on complete perform-
ance as a prerequisite of the right to sue in respect of 3 Performance prevented by the promise. A person
an entire contract. Although the point being made is still who is prevented from carrying out his side of the bar-
valid, the case itself would not be decided in the same gain by the other party can bring an action to recover for
way today. Cutter’s widow would now be able to argue the work he has done.
that her husband’s untimely death had frustrated the
contract and that she should recover in respect of the Planché v Colburn (1831)
valuable benefit her husband conferred on his employer
before his death under s 1(3) of the Law Reform (Fru- The claimant agreed to write a book on ‘Costume and
strated Contracts) Act 1943. Ancient Armour’, on completion of which he was to
receive £100. After he had done the necessary research
Bolton v Mahadeva (1972) and written part of the book, the publishers abandoned
the project. He recovered 50 guineas for the work he had
Bolton installed a central heating system in Mahadeva’s done. The claimant’s claim was based on quasi-contract.
house for an agreed price of £560. The work was carried He could not sue on the contract because the obligation
out defectively and it was estimated that it would cost to pay him did not arise until he had completed and
£179 to put matters right. The Court of Appeal held that delivered the work to the publishers, which he had not
since Bolton had not performed his side of the contract, done. He was able to sue on a quantum meruit (see later
he could recover nothing for the work he had done. in this chapter) for the work he had done.

In each of these cases, one party has profited from the 4 Divisible contracts. Some contracts are said to be
failure of the other to provide complete performance. A ‘entire’. This means that a party is not entitled to pay-
strict application of the rule about precise perform- ment until he has completely performed his part of the
ance would frequently lead to injustice. It is not surpris- contract, e.g. Cutter v Powell (1795). Other contracts
ing, therefore, that certain exceptions to the rule have may be divisible, i.e. the obligations can be split up into
developed. stages or parts. Payment can be claimed for each com-
pleted stage. A contract to build a house usually provides
1 Doctrine of substantial performance. If the court for payment to be made in three stages: after the foun-
decides that the claimant has substantially carried out dations have been laid, when the roof goes on, and on
the terms of the contract, the claimant may recover for completion of the house.
the work he or she has done. The defendant can coun-
terclaim for any defects in performance. Agreement

Hoenig v Isaacs (1952) The parties may have agreed in their original contract
that it should end automatically with the happening of
The claimant agreed to decorate the defendant’s flat and some event or after a fixed period of time. The agree-
fit a bookcase and wardrobe for £750. On completion of ment may have included a term allowing either party to
the work, the defendant paid £400 but he complained terminate the contract by giving notice. A contract of

250

Chapter 7 Introduction to the law of contract

employment, for example, can be brought to an end by 1 Physical impossibility. This is where something or
either the employer or employee giving reasonable someone necessary to carry out the contract ceases to be
notice to the other. The Employment Rights Act 1996 available.
lays down statutory minimum periods of notice. Em-
ployers must also consider the rules about unfair dis- Taylor v Caldwell (1863)
missal and redundancy. A contract may be discharged
by the execution of a separate agreement. The new The claimant had hired the Surrey Gardens and Music
agreement will only discharge the old contract if it pos- Hall for a series of concerts. However, after making the
sesses all the characteristics of a valid contract; in particu- agreement and before the date of the first performance,
lar, consideration must be present. When neither party the hall was destroyed by fire. It was held that the con-
has yet performed his side of the contract, there is no tract was discharged and the parties were released from
difficulty. Both sides, by waiving their rights, are provid- their obligations.
ing something of value which constitutes consideration.
The situation is different where one side has already If the presence of a particular person is necessary for
completely performed his obligations and the other party the execution of the contract, the death of that person
wishes to be released. The person seeking release must will clearly discharge the contract. Frustration may also
either provide fresh consideration or the agreement apply if a party is unavailable because of illness, intern-
must be drawn up in the form of a deed. ment or imprisonment.

Frustration Hare v Murphy Bros (1974)

An agreement which is impossible of performance from Hare was sentenced to 12 months’ imprisonment for
the outset will be void for mistake, as in Couturier v unlawful wounding and was, therefore, unavailable to
Hastie (1856). But what is the legal position where carry out his responsibilities as a foreman. It was held
initially it is perfectly possible to carry out the contract, that this frustrated his contract of employment.
and then a change in circumstances occurs making it
impossible to carry out the agreement? Comment. An employee who loses his job as a result of
long-term illness or, as in Hare’s case, a substantial term
Until the last century, the rule was that the parties were of imprisonment, may find that his contract of employ-
under an absolute duty to perform their contractual ment has been frustrated. The significance of such a
obligations. A person was not excused simply because finding is that there will not have been a ‘dismissal’
outside events had made performance impossible. according to the statutory provisions relating to unfair
dismissal (and redundancy). If there has been no ‘dis-
Paradine v Jane (1647) missal’, the employee cannot bring a claim for unfair
dismissal (or redundancy) against his employer.
During the course of the English Civil War a tenant was
evicted from certain property by Prince Rupert and his 2 Supervening illegality. A subsequent change in the
army. In an action by the landlord to recover three years’ law or in circumstances may make performance of the
arrears of rent, it was held that the tenant was not contract illegal. An export contract will be discharged if
relieved from the obligation to pay rent simply because war breaks out with the country of destination.
he had been unable to enjoy the property.

Starting with the case of Taylor v Caldwell (1863), the Denny, Mott & Dickson Ltd v James B
courts recognised an exception to the rule about abso- Fraser & Co Ltd (1944)
lute contracts under the doctrine of frustration: if
further performance of the contract is prevented be- The House of Lords refused to enforce an option to pur-
cause of events beyond the control of the parties, the chase a timber yard which was part of a contract invol-
contract is terminated and the parties discharged from ving the sale of timber because subsequent government
their obligations. The doctrine will apply in the circum- regulations had made performance of the main part of
stances described below. the contract, trading in timber, illegal.

251

Part 3 Business transactions

3 Foundation of the contract destroyed. The parties that the contract had been frustrated. Clearly, it had not
may have made their contract on the basis of some become impossible to carry out the contract: shipment
forthcoming event. If the event fails to take place and, as could have been made via the Cape of Good Hope – a
a result, the main purpose of the contract cannot be longer and much more expensive operation. The House
achieved, the doctrine of frustration will apply. of Lords held that this was not sufficient to discharge the
contract for frustration.
Krell v Henry (1903)

Henry hired a room overlooking the route of Edward VII’s Davis Contractors Ltd v Fareham Urban
coronation procession. The procession was cancelled District Council (1956)
owing to the King’s serious illness. Although it would
have been possible to come and sit in the room, the The claimant contractors agreed to build 78 houses in
main purpose of the contract, to view the procession, eight months for the defendant council. Owing to post-
had been destroyed. The Court of Appeal held that the war shortages of skilled labour and building materials, it
contract had been frustrated. took the contractors 22 months to complete the houses
at an additional cost of £17,651. The claimants argued
A contract will only be frustrated if the change in that the contract was frustrated because of the long
circumstances has had a substantial effect on the main delay caused by circumstances beyond their control and
purpose of the contract. they should be able to recover the full cost incurred on a
quantum meruit basis. The House of Lords held that the
Herne Bay Steam Boat Company v contract was not discharged by frustration. The contrac-
Hutton (1903) tors could have foreseen the possibility of shortages and
taken it into account when tendering for the work.
The claimant agreed to hire a steamboat, the Cynthia,
to the defendant for two days so that the defendant The doctrine of frustration will not apply in the fol-
could take paying passengers to see the naval review at lowing situations:
Spithead on the occasion of Edward VII’s coronation. An
official announcement was made cancelling the review, ■ Where the parties have foreseen the likelihood of
but the fleet still gathered and the Cynthia could have such an event occurring and have made express pro-
been used for a cruise around the fleet. The defendant vision for it in the contract.
did not make use of the boat and the claimant used her
for ordinary sailings. The claimant sued for £200, which ■ Where one of the parties is responsible for the frustrat-
was the outstanding balance on the contract to hire the ing event. This is known as ‘self-induced frustration’.
boat. A Court of Appeal held that the contract was not
discharged through frustration. The happening of the Maritime National Fish Ltd v Ocean
naval review was not the foundation of the contract. The Trawlers Ltd (1938)
claimant was entitled, therefore, to recover the £200 he
was owed under the contract. The appellants chartered a trawler from the respondents
which needed to be fitted with an otter trawl. It was
The fact that the contract has become more difficult and illegal to operate with an otter trawl unless a licence had
more expensive to carry out will not excuse the parties. been obtained. The appellants applied for five licences to
cover four trawlers of their own and the trawler on charter;
Tsakiroglou & Co Ltd v Noblee and Thorl however, they were granted only three licences. They
GmbH (1961) decided to nominate their own trawlers for licences rather
than the chartered trawler. The Judicial Committee of the
In October 1956 sellers agreed to deliver ground nuts Privy Council held that the contract was not frustrated
from Port Sudan to buyers in Hamburg, shipment to take as the appellants had decided quite deliberately not to
place during November/December 1956. On 2 November nominate the respondents’ trawler and were, therefore,
the Suez Canal was closed to traffic. The sellers failed to responsible for the frustrating event.
deliver and, when sued for breach of contract, argued
The doctrine of frustration was considered recently by
the Court of Appeal in Edwinton Commercial Corpora-
tion v Tsavliris (Worldwide Salvage and Towage) Ltd,
The Sea Angel (2007), a case which required the court to

252

Chapter 7 Introduction to the law of contract

decide whether a charterparty had been frustrated. Rix Anticipatory breach
LJ stated that the application of the doctrine required This is where a party states in advance that he does not
a multifactorial approach. The factors to be considered intend to carry out his side of the contract or puts him-
included the terms of the contract, its context, the parties’ self in a position whereby he will be unable to perform.
knowledge, expectations, assumptions and contemplations, The injured party may sue immediately for breach of
in particular as to risk, as at the time the contract was contract or, alternatively, wait for the time for perform-
concluded, the nature of the supervening event, and the ance to arrive to see whether the other party is prepared
parties’ calculations as to the possibilities of future per- to carry out the contract.
formance in the new circumstances. The test of ‘radically
different’ is important: it means that the doctrine should Hochster v De la Tour (1853)
not be invoked lightly. The mere incidence of expense or
delay or onerousness is not sufficient. There has to be a The claimant was engaged by the defendant in April
break in the identity between the contract as provided for 1852 to act as a courier for travel in Europe from 1 June
and contemplated and its performance in new circum- 1852. On 11 May the defendant wrote to the claimant
stances. As Rix LJ put it ‘the doctrine is one of justice’. to inform him that his services were no longer required.
The claimant started an action for breach of contract on
The consequences of frustration 22 May. Although the date for performance had not yet
arrived, it was held that the defendant’s letter constituted
At common law, a frustrating event has the effect of an actionable breach of contract.
bringing the contract to an immediate end. The rights
and liabilities of the parties are frozen at the moment It can be dangerous to wait for the time for perform-
of frustration. The rule was that money payable before ance. The injured party may lose the right to sue for
frustration remained payable and money paid before breach of contract if in the meantime the contract is
frustration could not be recovered. Any money which discharged for frustration or illegality.
did not become payable until after frustration ceased to
be payable. The harsh consequences of this rule were Avery v Bowden (1855)
modified by the House of Lords in the Fibrosa case
(1943) and wider changes were introduced under the The defendant chartered the claimant’s ship, the
Law Reform (Frustrated Contracts) Act 1943. The Act Lebanon, and agreed to load her with a cargo at Odessa
made two important changes: within 45 days. During this period, the defendant told the
claimant on a number of occasions to sail the ship away
1 money payable before frustration ceases to be payable as it would not be possible to provide a cargo. The
and money paid before frustration can be recovered claimant kept the ship at Odessa hoping that the defend-
(the court may in its discretion allow the payee to ant would carry out his side of the contract. Before the
recover or retain all or part of the sums to cover any 45 days had expired, the Crimean War broke out. Odessa
expenses incurred); became an enemy port and it would have been illegal to
carry out the contract. Assuming that the defendant’s
2 a party who has carried out acts of part performance repeated statements amounted to an anticipatory breach,
can recover compensation for any valuable benefit the claimant could have accepted the breach and sued
(other than a payment of money) conferred on the at once. However, by choosing to keep the contract alive
other party. he lost his right to sue because of the illegality.

The Act does not apply to (a) contracts for the carriage Actual breach
of goods by sea, (b) insurance contracts, or (c) contracts One party may fail completely to perform his side of the
for the sale of specific goods, which are covered by s 7 of bargain or he may fail to carry out one or some of his
the Sale of Goods Act 1979. The parties may exclude the obligations. Not every breach of contract has the effect
effect of the Act by express agreement. of discharging the parties from their contractual obliga-
tions. The terms of a contract may be divided into those
Breach terms which are important (conditions) and the less

A breach of contract may occur in a number of ways. It
may be an anticipatory or an actual breach.

253

Part 3 Business transactions

important terms (warranties). The distinction will be Sunkist Tours – Cancellation charges
considered in more detail in Chapter 9 . A breach of
condition does not automatically terminate the con- Cancellation notified Charges
tract. The injured party has a choice: he may wish to be
discharged from the contract or he may prefer to carry Over 6 weeks prior to departure Loss of deposit
on with the contract and claim damages for the breach.
A breach of warranty only entitles the injured party to Within 4 to 6 weeks of departure 30% of holiday cost
sue for damages.
Within 2 to 4 weeks of departure 45% of holiday cost

Remedies Within 1 day to 2 weeks of 60% of holiday cost
departure 100% of holiday cost

On or after the day of departure

So far we have looked at the essential elements of a valid Figure 7.3 An example of a cancellation charges
contract, the factors which may affect the validity of an notice
agreement and the ways in which a contract may come
to an end. We now turn to the remedies available to the Dunlop Pneumatic Tyre Co Ltd v New
injured party when a term of the contract has been bro- Garage & Motor Co Ltd (1915)
ken. Every breach of contract will give the injured party
the common law right to recover damages (financial Dunlop supplied tyres to New Garage under an agree-
compensation). Other remedies, such as specific perform- ment by which, in return for a trade discount, New
ance and injunction, may be granted at the discretion of Garage agreed to pay £5 by way of ‘liquidated damages’
the court as part of its equitable jurisdiction. for every item sold below list prices. The House of Lords
held that since the sum was not extravagant, it was a
Damages genuine attempt by the parties to estimate the damage
which price undercutting would cause Dunlop. The £5
In the business world it is quite common for the parties was liquidated damages.
to agree in advance the damages that will be payable in
the event of a breach of contract. These are known as Ford Motor Co v Armstrong (1915)
liquidated damages. If there is no prior agreement as to
the sum to be paid, the amount of damages is said to be Armstrong, a retailer, agreed to pay £250 for each Ford
unliquidated. car sold below the manufacturer’s list price. The Court of
Appeal held that the clause was void as a penalty.
Liquidated damages
More recent examples of the distinction between liquid-
It makes commercial common sense for the parties to ated damages and penalty clauses are provided by the
establish at the outset of their relationship the finan- following cases.
cial consequences of failing to live up to their bargain.
Provided the parties have made a genuine attempt to Murray v LeisurePlay Ltd (2005)
estimate the likely loss, the courts will accept the relev-
ant figure as the damages payable. In practice, knowing Murray, a director of LeisurePlay, had a clause in his
the likely outcome of any legal action, the party at fault service contract which entitled him to payment of a
will simply pay up without argument. An example of year’s gross salary if his contract was terminated without
liquidated damages are the charges imposed for can- one year’s notice. Murray was given seven-and-a-half
celling a holiday (see Fig 7.3). weeks’ notice and he brought a claim for liquidated dam-
ages. LeisurePlay argued that the clause was a penalty
Of course, there is a temptation for a party with clause and therefore unenforceable. The Court of Appeal
stronger bargaining power to try to impose a penalty held that it was not a penalty clause. In deciding such
clause, which is really designed as a threat to secure per- cases courts should consider:
formance. The distinction between liquidated damages
and penalty clauses is illustrated by the following cases.

254

Chapter 7 Introduction to the law of contract

(a) to what breaches of contract the clause applies; 1 The damage can include sums for financial loss,
(b) what amount is payable on breach; damage to property, personal injury and distress, dis-
(c) what amount would be payable if the claim was appointment and upset caused to the claimant.

brought under common law; Jarvis v Swans Tours (1973)
(d) what were the parties’ reasons for agreeing the
Jarvis, a solicitor, paid £63.45 for a two-week winter
clause; sports holiday in Switzerland. The Swans Tours brochure
(e) whether the party who claims the clause is a penalty promised a ‘house party’ atmosphere at the hotel, a bar
which would be open several evenings a week and a
can show that it was imposed as a deterrent and that host who spoke English. The holiday was a considerable
it does not constitute a genuine pre-estimate of loss. disappointment: in the second week, he was the only
guest in the hotel and no one else could speak English.
M & J Polymers Ltd v Imerys Minerals The bar was only open one evening and the skiing was
Ltd (2008) disappointing. The Court of Appeal awarded him £125 to
compensate for ‘the loss of entertainment and enjoy-
The Commercial Court had to decide whether a ‘take or ment which he was promised’.
pay’ clause in a contract for the supply of chemical dis-
persants amounted to a penalty. A ‘take or pay’ clause is Exemplary or punitive damages designed to punish the
a provision which obliges a buyer to pay for a minimum party in breach are not normally awarded in contract.
quantity of products, irrespective of whether that quantity
is ordered. Burton J held that the clause in question was 2 The injured party cannot necessarily recover dam-
not a penalty, although as a matter of principle the rule ages for every kind of loss which he has suffered. The
against penalties could apply to ‘take and pay’ clauses. breach might have caused a chain reaction of events to
Based on the facts of the case, he was satisfied that the occur. Clearly, there is a point beyond which the damage
clause was commercially justifiable, was not oppressive, becomes too remote from the original breach. The rules
was entered into freely by parties of comparable bargain- relating to remoteness of damage were laid down in
ing power, and did not have the predominant purpose of Hadley v Baxendale (1854). The injured party may recover
deterring a breach of contract or amount to a provision damages for:
‘in terrorem’.
■ loss which has resulted naturally and in the ordinary
If the court holds that the sum is liquidated damages, it course of events from the defendant’s breach; and
will be enforced irrespective of whether the actual loss is
greater or smaller. ■ the loss which, although not a natural consequence of
the defendant’s breach, was in the minds of the par-
Cellulose Acetate Silk Co Ltd v Widnes ties when the contract was made.
Foundry Ltd (1933)
The practical application of these rules can be seen in
Widnes Foundry agreed to pay £20 for every week of the following cases.
delay in completing a plant for the Silk Co. The work was
completed 30 weeks late. The Silk Co claimed that its Victoria Laundry (Windsor) Ltd v Newman
actual losses amounted to nearly £6,000. It was held that Industries Ltd (1949)
Widnes Foundry was only liable to pay £20 a week (i.e.
£600) as agreed. The claimant company of launderers and dyers wished to
expand its business and, for this purpose, had ordered a
Unliquidated damages new boiler from the defendants. The boiler was damaged
during the course of its removal and, as a result, there was
The aim of unliquidated damages is to put the injured a five-month delay in delivery. The claimant claimed:
party in the position he would have been in if the con-
tract had been carried out properly. Damages are (a) damages of £16 per week for the loss of profits it
designed to compensate for loss. If no loss has been suf- would have made on the planned expansion of the
fered, the court will only award nominal damages, laundry business; and
which is a small sum to mark the fact that there had been
a breach of contract. The courts observe the following
guidelines when awarding damages:

255